Can the Fed Target Inflation? toward an Institutionalist Approach

By Fullwiler, Scott T.; Allen, Geoffrey | Journal of Economic Issues, June 2007 | Go to article overview

Can the Fed Target Inflation? toward an Institutionalist Approach


Fullwiler, Scott T., Allen, Geoffrey, Journal of Economic Issues


This paper provides a framework for Institutionalist analysis of the determinants of inflation and inflation targeting policies based upon principles in F. Gregory Hayden's book, Policymaking for a Good Society (2006).

Theoretical Background

Milton Friedman famously argued, "inflation is everywhere and always a monetary phenomenon." In debates with orthodox Keynesians regarding the appropriate method of modeling the transmission of monetary policy, Friedman preferred analysis via the quantity theory of money and reduced-form models rather than detailing within structural models the links between monetary policy and inflation. Of course, in addition to the money supply, the natural rates of unemployment and inflation expectations also were key in Friedman's understanding of the transmission of monetary policy to inflation.

Central banks in the real world target interest rates, not monetary aggregates, while neither economists nor central bankers have uncovered a particular rate of unemployment--or a methodology for doing so in real time--that was reliably linked to the inflation rate. As the only part of Friedman's transmission mechanism that remains, inflation expectations are front and center within the current "New Consensus" framework for analyzing monetary policy. (1) In the New Keynesian Phillips curve--standard in the "New Consensus" literature--inflation is determined by expected inflation and the current output gap. In a core "New Consensus" paper, Clarida, Gali, and Gertler (1999) argue that inflation expectations are set by current and expected future paths of the output gap, while the output gap depends on current and expected future paths of monetary policy. As Michael Woodford put it, "not only do expectations about policy matter, at least under current conditions, little else matters" (2004, 16; emphasis in original). In order to "anchor" these expectations and keep inflation low, "New Consensus" adherents propose monetary authorities follow credible, systematic monetary policy strategies, such as Taylor's (1993) famous interest-rate feedback rule, in which a predictable, aggressive policy reaction occurs when inflation exceeds its target. In short, while the "New Consensus" emphasis on expectations "may bypass money ... it has retained the key [Friedmanian] conclusion that central banks ultimately determine the inflation rate" (Meyer 2001, 3).

The "New Consensus" research program retains Friedman's lack of interest in empirically investigating and explicitly modeling the avenues of monetary transmission through the economy to the inflation rate. Consider, for example, the growing literature seeking the best "short run" measure of inflation. In this literature, the primary criterion for an appropriate "short run" measure--be it "core" inflation, "trimmed mean" inflation, "median" inflation, or some other adjustment to a price index--is that it be the best predictor of "longer run" trends in a complete price index (e.g., Webb 2004; Dolmas 2005; Rich and Steindel 2005; Khettry and Mester 2006). While "experience indicates that food and energy prices are subject to large short-run disturbances that are beyond the ability of monetary policy to control" (Poole 2006, 161), this is now insufficient grounds for excluding food and energy prices from the "short-term" measure of inflation being targeted by the Fed as "core" measures of inflation have done. Instead, inclusion of prices in the energy, food, or any other sector into a "short run" inflation measure depends upon whether "longer-run" inflation predictions improve. As with both Friedman and the "New Consensus," it is taken as given that "long-term" inflation is set by monetary policy.

Toward an Institutionalist Approach

An Institutionalist approach to analyzing inflation targeting would differ markedly. Specifically, the Personal Consumption Expenditures Price Index (PCEPI) and the Consumer Price Index (CPI) are broadly accepted empirical measures of aggregate prices in the United States. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Can the Fed Target Inflation? toward an Institutionalist Approach
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.