Frederic S. Mishkin (*)
From the beginning of my academic career, my research has always been driven by an interest in the role of monetary policy in the economy, even when it dealt with somewhat different topics such as econometric technique or financial instability and banking issues. (1) My stint inside the Federal Reserve System as the research director at the Federal Reserve Bank of New York naturally further stimulated my interest in monetary policy issues and so has led me to think more about how central banks actually conduct monetary policy and how the conduct of monetary policy might be improved. This research summary reports on my work over the past several years on monetary policy strategy and tactics, not only in the United States, but also in emerging markets and other industrialized countries.
Monetary Policy Strategies: The International Experience
In recent years a growing consensus has emerged to elevate price stability to the overriding, long-run goal of monetary policy. Thus it is not surprising that a central feature of monetary policy strategies is the use of a nominal anchor in some form. There are four basic types of monetary policy strategies, each of which uses a different nominal anchor: 1) exchange-rate targeting; 2) monetary targeting; 3) inflation targeting; and 4) monetary policy with an explicit goal, but not an explicit nominal anchor (what I call the "just do it" approach.)
My work on monetary policy strategy began with a paper written with Ben Bernanke in 1992 that focused on monetary targeting in six industrialized countries; this has been followed by a series of other papers analyzing monetary targeting in industrialized countries. (2) Monetary targeting has been used as a successful strategy for monetary policy in two countries, Germany and Switzerland; for this reason, monetary targeting still has strong advocates and is part of the official policy strategy for the European Central Bank. However, monetary targeting in Germany and Switzerland is quite different from a Friedman-type monetary targeting rule, in which a monetary aggregate is kept on a constant-growth-rate path and is the primary focus of monetary policy. Instead, monetary targeting in Germany and Switzerland should be seen as a method of communicating the strategy of monetary policy, focusing on long-run considerations and the control of inflation. The very flexible approach to monetary targeting -- for exampl e, the Bundesbank missed its target ranges on the order of 50 percent of the time -- was adopted because the relationship between monetary aggregates and goal variables, such as inflation and nominal income, has not remained strong or reliable in Germany and Switzerland, or in other industrialized countries. (3) Indeed, the key elements of monetary targeting that led to its success in Germany and Switzerland -- flexibility, transparency, and accountability -- are also central elements in inflation targeting regimes. Other industrialized countries that have pursued monetary targeting, such as the United States, Canada, and the United Kingdom, have found it to be an even less successful strategy, partially because it was not pursued seriously, but also because of the dramatic breakdown of the relationship between monetary aggregates and inflation when monetary targeting was adopted.
Emerging market countries also have toyed with the idea of monetary targeting, particularly in Latin America, but as my paper with Miguel Savastano points out, despite what is often said, no central bank in Latin America has truly practiced monetary targeting. (4) The monetary policy frameworks of many Latin American central banks have used the information conveyed by a monetary aggregate to conduct monetary policy, but the other two elements (public announcements of the targets and some type of accountability mechanism) rarely have been present at the same time. …