Year: 2025
Type: article
Abstract: The monetary policy environment has changed considerably since the mid-twentieth century, from the development of economic thinking to the changes in policy priorities and the lessons learned from past experiences.Each transition, from the demise of the gold standard to floating exchange rates, monetary targeting and, more recently, the introduction of inflation targeting, has been a reactive response to the prevailing economic conditions of the time, whether driven by inflation, financial stability concerns, or geopolitical pressures.Despite these changes, the question must be asked: is there a better framework to ensure long-term price stability and economic growth?Since the early 1990s inflation targeting has been at the heart of contemporary monetary policy.This regime aims to maintain price stability by keeping inflation close to a medium-term target, generally around 2 per cent annually.While widely adopted by central banks of advanced economies as the global standard, the limitations of this framework have been exposed by financial crises and supply-side shocks.Too often, central banks have underestimated the influence of fiscal policy and their own balance sheet expansions on inflation trends, contributing to monetary policy decisions that have added to the erosion of real incomes and exacerbated the cost-of-living crisis.I believe we should have a fundamental rethink of the current monetary policy framework.Central banks should implement a framework that targets the growth rate or level path of nominal GDP (NGDP) 1 rather than relying on an inflation target of 2 per cent.NGDP targeting (NGDPT) offers a more transparent, rule-based approach that reduces subjectivity and the risk of policy errors by looking to stabilise total nominal spending in the economy.In contrast, the current 'constrained discretion' 2 framework gives policymakers considerable flexibility (discretion) to react to fluctuating economic conditions within loosely defined parameters (constraints).By reducing reliance on discretionary decision-making, NGDPT would increase predictability and transparency for financial markets, thereby allowing central banks to regain any lost credibility.
Source: Economic Affairs
DOI: 10.1111/ecaf.12711
Author: Damian Pudner
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,900
OpenAlex ID: W4410418707