Academic journal article The Reserve Bank of New Zealand Bulletin

Inflation Targeting, the Financial Crisis and Macroeconomics: An Interview with Mark Gertler

Academic journal article The Reserve Bank of New Zealand Bulletin

Inflation Targeting, the Financial Crisis and Macroeconomics: An Interview with Mark Gertler

Article excerpt

Few people have had such strong influence on macroeconomics in general and on the New Keynesian School of macroeconomics as Mark Gertler has. His work with Ben Bernanke and Simon Gilchrist on the role of credit and financial conditions on business cycles, and with Ben Bernanke on whether the central banks should respond to asset price bubbles, are some examples of his influential work. Mark Gertler is the Henry and Lucy Moses Professor of Economics at New York University, and visited the Reserve Bank of New Zealand for the Monetary Policy conference held in Wellington on 17-18 December 2009. The conference was organised jointly by the Reserve Bank of New Zealand and the Center for International Economic Development to mark the 20th anniversary of inflation targeting in New Zealand. Ozer Karagedikli from the Economics Department of the Reserve Bank interviewed him. (1)

Ozer Karagedikli

Professor Gertler, welcome to New Zealand and thank you for taking time for this interview. I understand this is your first time in this part of the world and it is a pleasure having you here at the Reserve Bank. You are here for a conference to mark the 20th anniversary of inflation targeting in New Zealand. Twenty years ago New Zealand passed the Reserve Bank of New Zealand Act (1989), which gave the Reserve Bank the price stability role and independence "to achieve and maintain price stability", which became known as inflation targeting. Do you think the inflation targeting framework has served us, ie, New Zealand and the twenty odd other countries that are using the same framework, well?

Mark Gertler

I think one of the remarkable achievements of central banks over the last several decades has been price stability. And I think a central factor in that has been inflation targeting: either of the explicit kind that New Zealand and other countries have adopted or of the implicit kind that the Federal Reserve has been following over roughly the same period. We have seen the benefits of price stability during the 'great moderation' era. There was a period of very robust growth and central banks didn't have any reason to have to derail the growth because we had price stability. And I think the inflation targeting framework has helped in the current crisis because things would have even got worse, had deflation took hold. But I think that for many countries the public are of the mind that central banks are committed to two percent inflation over the long term and that seems to have served us well in this crisis to help prevent deflation--so far.

[ILLUSTRATION OMITTED]

OK

You said either explicit or implicit inflation targeting. I assume you see no difference between the two?

MG

Well, it's hard to say. In the US, it seems to have worked thus far. Implicitly, it was very clear to anyone following the Federal Reserve that they had a goal of long-term inflation of two percent. If you look at the history of interest rates setting, you know any signs of inflation typically led to an increase in interest rates. I think the Fed has established a reputation. From an institutional perspective, it has come a little closer to formal inflation targeting in the sense that it now announces an inflation forecast for three years down the road. This forecast is effectively the target. It does remain that there is an open question as to how much difference going all the way to formal inflation targeting would make. Maybe there are some scenarios where it could make a difference. But this is probably less true for a country like the US which has built up credibility over a long period. It may be different for a central bank that has not had this long experience with price stability. It may be more important in that kind of situation.

OK

Coming back to the great moderation; do you think the great moderation was entirely, or at least mainly, due to better monetary policy? …

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