Inflation targeting is a monetary-policy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and has, as of 2010, been adopted by about 25 industrialized and emerging-market economies. The chapter discusses the history, macroeconomic effects, theory, practice, and future of inflation targeting.

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This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy. It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist, less rules-based, and less predictable. The policy implications are thus that policy should “get back on track. ” The article is a modified version of a presentation given at the Federal Reserve Bank of Philadelphia’s policy forum “Policy Lessons from the Economic and Financial Crisis, ” December 4, 2009. The presentation was made during a panel discussion that also included James Bullard and N. Gregory Mankiw.

beyond the crisisMacroeconomic management beyond the crisis

(Caballero, Farhi and Gourinchas (2008a, 2008b), Gourinchas and Rey (2007)). It is also very much inspired by

invaluable. Helpful comments and suggestions from Ed Nelson and numerous Bank of England colleagues are also gratefully acknowledged. The views expressed do not necessarily reflect those of either the Bank of England or the Monetary Policy Committee.

are those of the author and do not necessarily reflect those of either the Bank of England or the Monetary Policy Committee. Summary Charles Bean, the Bank of England’s Deputy Governor, Monetary Policy, was invited to deliver the Schumpeter lecture at the Annual Congress of the European Economic Association. The Great Moderation, the Great Panic and the Great Contraction, looks back at the causes of the financial crisis and subsequent recession. He argues that much of what went wrong can be analysed using standard economic tools. The Great Moderation was a period of unusually stable macroeconomic activity in advanced economies. This was partly thanks to good luck, including the integration of emerging market countries into the global economy, and partly a dividend from structural economic changes and better policy frameworks. The longer this stability persisted, the more markets became convinced of its permanence and risk premia became extremely low. Real short and long term interest rates were also low due to a combination of loose monetary policy, particularly in the US, and strong savings rates in a number of surplus countries. Low interest rates and low apparent risk created strong incentives for financial institutions to

www.riksbank.se Inflation targeting after the financial crisis * As the world economy begins to recover from the financial crisis and the resulting deep recession of the global economy, there is a lively debate about what caused the crisis and how the risks of future crises can be reduced. Some blame loose monetary policy for laying the foundation for the crisis and there is a lively debate about the future of monetary policy and its relation to financial stability. Here I will discuss the lessons for inflation targeting after the crisis. My view is that the crisis was not caused by monetary policy but mainly by regulatory and supervisory failures in combination with some special circumstances. Ultimately, my main conclusion for monetary policy from the crisis so far is that flexible inflation targeting, applied in the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis. But a better theoretical, empirical and operational understanding of the role of financial factors in the transmission

According to almost all theoretical open-economy macro models, monetary policy influences real exchange rates through its effects on expected current and future real interest rates. These models assume that excess returns are either constant, or if time varying, are not affected by monetary policy. But monetary policy may also influence the real exchange rate through its effects on current and future expected excess returns. We implement an empirical method that measures the influence of monetary policy through these two channels on U.S. real exchange rates relative to the G7 countries and Switzerland. We find that surprise monetary tightening raises current and expected real interest rates, which works to appreciate the currency. But the effects of monetary shocks on bilateral excess returns differ from currency to currency. In some cases, the effect works to offset the real interest rate effect, while in other cases it amplifies it.