Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- 1 Introduction
- 2 Welcome remarks: a Norwegian perspective
- 3 Reflections on inflation targeting
- 4 Inflation targeting at twenty: achievements and challenges
- 5 Inflation targeting twenty years on: where, when, why, with what effects and what lies ahead?
- 6 How did we get to inflation targeting and where do we need to go to now? A perspective from the US experience
- 7 Inflation control around the world: why are some countries more successful than others?
- 8 Targeting inflation in Asia and the Pacific: lessons from the recent past
- 9 Inflation targeting and asset prices
- 10 The optimal monetary policy instrument, inflation versus asset price targeting, and financial stability
- 11 Expectations, deflation traps and macroeconomic policy
- 12 Heterogeneous expectations, learning and European inflation dynamics
- 13 Inflation targeting and private sector forecasts
- 14 Inflation targeting, transparency and inflation forecasts: evidence from individual forecasters
- 15 Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters
- 16 Macro-modelling with many models
- 17 Have crisis monetary policy initiatives jeopardised central bank independence?
- 18 Inflation targeting: learning the lessons from the financial crisis
- 19 The financial crisis as an opportunity to strengthen inflation-targeting frameworks
- 20 ‘Leaning against the wind’ is fine, but will often not be enough
- 21 Inflation targeting, capital requirements and ‘leaning against the wind’: some comments
- Index
11 - Expectations, deflation traps and macroeconomic policy
Published online by Cambridge University Press: 05 October 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- 1 Introduction
- 2 Welcome remarks: a Norwegian perspective
- 3 Reflections on inflation targeting
- 4 Inflation targeting at twenty: achievements and challenges
- 5 Inflation targeting twenty years on: where, when, why, with what effects and what lies ahead?
- 6 How did we get to inflation targeting and where do we need to go to now? A perspective from the US experience
- 7 Inflation control around the world: why are some countries more successful than others?
- 8 Targeting inflation in Asia and the Pacific: lessons from the recent past
- 9 Inflation targeting and asset prices
- 10 The optimal monetary policy instrument, inflation versus asset price targeting, and financial stability
- 11 Expectations, deflation traps and macroeconomic policy
- 12 Heterogeneous expectations, learning and European inflation dynamics
- 13 Inflation targeting and private sector forecasts
- 14 Inflation targeting, transparency and inflation forecasts: evidence from individual forecasters
- 15 Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters
- 16 Macro-modelling with many models
- 17 Have crisis monetary policy initiatives jeopardised central bank independence?
- 18 Inflation targeting: learning the lessons from the financial crisis
- 19 The financial crisis as an opportunity to strengthen inflation-targeting frameworks
- 20 ‘Leaning against the wind’ is fine, but will often not be enough
- 21 Inflation targeting, capital requirements and ‘leaning against the wind’: some comments
- Index
Summary
Introduction
Following the introduction of inflation targeting and related monetary strategies, target inflation seems to have fallen to relatively low rates, about 2 to 3 per cent in many countries. This implies that large adverse shocks might push the economy into periods of deflation. This was clearly a major concern in the United States during the 2001 recession. The experiences of 2008 and 2009, as well as the earlier experience of Japan since the 1990s, have underlined these concerns and created a situation in which the monetary policy response is constrained by the zero lower bound on nominal interest rates – a phenomenon sometimes called a ‘liquidity trap’. Furthermore, in a liquidity trap there is the potential for the economy to get stuck in a deflationary situation with declining or persistently low levels of output.
The theoretical plausibility of the economy becoming trapped in a deflationary state, and the macroeconomic policies that might be able to avoid or extricate the economy from a liquidity trap, have been examined predominantly from the rational expectations (RE) perspective. One central feature of this literature emphasises the role of commitment. For example, Krugman (1998) and Eggertsson and Woodford (2003) argue that, if the economy encounters a liquidity trap, monetary policy should be committed to being expansionary for a considerable period of time, by keeping interest rates near zero even after the economy has emerged from deflation. Another issue concerns the possibility of permanent deflation.
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- Twenty Years of Inflation TargetingLessons Learned and Future Prospects, pp. 232 - 260Publisher: Cambridge University PressPrint publication year: 2010
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