Economic Effects of Inflation Targeting
Jim Saxton (R-NJ)
Joint Economic Committee
United States Congress
October 2005
Joint Economic Committee
433 Cannon House Office Building
Washington, DC 20515
Phone: 202-226-3234
Fax: 202-226-3950
Internet Address:
http://www.house.gov/jec/
After decades of debate, the case for inflation targeting is well established. This paper focuses on one
key ingredient of the argument supporting inflation targeting: the proposition that a credible
implementation of inflation targeting will calm and stabilize various financial markets, anchor the price
system, and limit inflation as well as its variability and persistence. Other competing views – i.e., (a) that
inflation targeting has no impact on financial markets and (b) that inflation targeting leads to asset price
bubbles and hence to financial market volatility – are briefly outlined.
These alternative views are presented and briefly contrasted with existing empirical evidence. Some
key findings include the following:
•There is little or no evidence that inflation targeting adversely affects financial markets.
•While not unanimous, the weight of the existing empirical evidence appears to support the view that
inflation targeting matters and will work to calm and limit the variability of financial markets as well as
the persistence of inflation. As the empirical literature suggests, this will likely help to foster healthier
economic growth. Although some research findings are consistent with competing hypotheses, this
research has a number of problems.
Since there is little evidence that inflation targeting has adverse effects on financial markets or the
economy, adopting inflation targeting once price stability is attainted likely will make maintaining price
stability easier. As emphasized by others, adopting inflation targeting will help future economic
performance in that gains in credibility will be preserved for future Federal Reserve chairmen.
Economic Effects of Inflation Targeting
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