Is inflation targeting passé?
The title of Part III, “Central banking, a revolution under way?,” sounds rather provocative, since one does not normally think of central bankers as being revolutionaries. The public actually tends to view central bankers as outright conservative, if not just plain boring, although, in all fairness, they should really be described as evolutionists. Admittedly, many changes have taken place in the theory and the practice of central banking during Alexander’s long and distinguished career. I need only mention here the breakdown of the Bretton Woods system and the move from fixed to flexible exchange rates as far as the world’s major currencies are concerned; the trend towards full convertibility and the almost perfect international capital mobility; the birth of the euro; the greater independence of central banks with the emphasis on governance, transparency, and accountability; the accent on credibility and communication; the growing recognition of the responsibility of central banks in the area of financial stability; the understanding of the paramount importance of price stability and the rejection of a long-run unemployment-inflation tradeoff; the appreciation of the importance of expectations and of the implications of the rational expectations hypothesis; and, last, but not least, the adoption of inflation targeting (or flexible inflation targeting) as the favored monetary policy framework in many countries. However, most of these changes took place gradually, so it is more appropriate to talk about evolution rather than revolution. In this chapter, I will focus on just one of these changes, namely the emergence of inflation targeting as the dominant monetary policy recipe, and, in order to nonetheless retain some of the provocative flavour that Charles Wyplosz intended for this session, I will be posing the question: Is inflation targeting passé?