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By Robert L. Hetzel


Is inflation targeting suitable for the United States? Given that the Federal Reserve has not announced an explicit inflation target, how does one answer that question? If the answer is that inflation targeting is not suitable for the United States, what follows? Does the central bank not control inflation? Alternatively, if the central bank does control inflation, is there no need in a democracy for the central bank to make public its intentions with respect to inflation? Some members of the Federal Open Market Committee (FOMC) who have opposed an explicit inflation target have also answered the question of whether the central bank controls inflation in the affirmative. So there is something too simplistic about the follow-up question about central bank accountability. Surely, there is something more to the opposition than a desire to avoid accountability. Laurence Meyer (2001: 12), when a Federal Reserve governor, explained the complication as follows: The most important question that has to be addressed in order to assess the costs and benefits of a move in this direction [announcement of an explicit numerical inflation target] is whether it could be accomplished without reducing the flexibility the Fed now has to pursue a dual mandate. The Fed’s Dual Mandate What is the dual mandate? The Federal Reserve Act instructs the Fed “to promote effectively the goals of maximum employment [and] stable prices. ” However, the language is vacuous. “Maximum employment” suggests a target of 100 percent labor force participation. Eve

Year: 2011
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