How Did We Get to Inflation Targeting and Where Do We Go Now? A Perspective from the U.S. Experience

Abstract

This paper advances the hypothesis that the transition from there-is-little-central-banks-can-do-tocontrol-inflation to inflation targeting occurred because central banks, especially the Federal Reserve, demonstrated that central banks can control inflation rather than a consequence of marked improvement in the professions understanding of how monetary policy controls inflation. As consequence, monetary theorists and central bankers have returned to a Phillips curve framework for formulating and evaluating the monetary policy. I suggest that the return to the Phillips curve framework endangers the continued effectiveness, and perhaps even viability, of inflation targeting, recommend three steps that inflation-targeting central banks should take to preserve and strengthen inflation targeting. JEL Codes: E52, E58