Which is better, Inflation targeting or Monetary Targeting?
In Inflation Targeting, Bernanke proposes an incremental move toward Inflation Targeting, in the form of a long run inflation objective which he termed OLIR (Optimal long-run Inflation Rate). This he reckoned might help the Federal Reserve communicate better with the general public, as well as improve policy decisions, without losing its flexibility as feared by some critics. Before arriving at his proposal Bernanke, acknowledged the strong credibility of the Federal Reserve as an inflation fighter, which granted it the flexibility in responding to short-run disturbances to output and employment, without destabilizing inflation. He agrees momentarily that it sounded bizarre reducing this flexibility unnecessarily by announcing an explicit target for Inflation. He also stressed on the enhanced importance of public beliefs and expectations about monetary policy in the region of price stability and advocates for greater attention by the central bank to its methods of communication when inflation is low. The OLIR which is the relevant concept for Dual-mandate for the Federal Reserve and other central banks, is the long-run inflation rate that achieves the best average economic performance over time with respect to both the inflations and output objectives. In general, the OLIR if correctly measured will be greater than zero inflation. Bernanke further went on to provide guidelines as to how FOMC (Federal Open Market Committee) should announce its value for the OLIR to the public;
• The FOMC believes that the stated inflation rate is the one that best promotes its output, employment, and price stability goals in the long run. Hence, in the long run, the FOMC will try to guide the inflation rate toward the stated value and maintain it near that value on average over the business cycle.
• However, the FOMC regards this inflation rate as a long-run objective only and sets no fixed time frame for reaching it. In...