2011 Presentations (Communicative Events)

Inflation Targeting and Financial Stability

Woodford, Michael

From page 1 -- 'A number of commentators have suggested that central banks should reconsider the desirability of inflation targeting in the light of the global financial crisis. Early on, Paul DeGrauwe (2007) asserted that the crisis had “unveiled the fallacy” of the consensus view in favor of inflation targeting as an approach; a little later, Axel Leijonhufvud (2008) argued that inflation targeting “has failed” as a strategy, and that “the problems we now face are in large part due to this policy failure”; and more recently, Francesco Giavazzi and Alberto Giovannini (2010) have proposed that inflation targeting, as conventionally practiced, “can ... increase the likelihood of a financial crisis.”
How seriously should inflation-targeting central banks take these charges? I think it is important to distinguish between inflation targeting as such and the more specific doctrine — enunciated by some prominent proponents of inflation targeting, but not, in my view, a defining feature of this approach to the conduct of monetary policy — according to which central banks need not pay attention to asset prices, or more generally to concerns relating to financial stability, when making monetary policy decisions.'