膨胀与增长的警世寓言
A cautionary tale of inflation and growth

The financial crisis has shaken the world economy and prompted questions that strike at the heart of monetary economics.

As governments, banks and households in advanced economies struggle to reduce debt, growth has plummeted. Weak growth is undermining efforts to repair balance sheets and causing more austerity. This vicious circle is creating problems for all economies.

Against this backdrop, many question whether central banks are capable of supporting demand while maintaining economic stability. Some have even advocated extreme responses, such as pursuing higher inflation or abandoning existing monetary policy frameworks.

These views are misguided. Now is not the time to risk abandoning frameworks that have proved their worth through the crisis and will be essential to sustain the recovery.

For example, moving temporarily to a higher inflation target risks un-anchoring inflation expectations and squandering the hard-won gains of entrenched price stability. Higher and more uncertain inflation raises risk premiums and real interest rates, and worsens debt dynamics.

Central banks are most effective when they operate with clear and stable objectives. The pursuit of temporarily higher inflation could only work if policy were anchored to a new target, such as nominal gross domestic product – total output at market prices, unadjusted for inflation.

However, the uncertain rewards of such a regime shift must be weighed against the risks of giving up what is arguably the most successful monetary policy idea in history: flexible inflation targeting.

This provides a goal – an inflation target – that is both immutable and credible, while allowing for changes in the time horizon over which it is achieved. In short, flexible inflation targeting allows central banks to deliver what is expected while dealing with the unexpected.

An inflation target makes it easier, not harder, to take aggressive and pre-emptive policy action. The clarity and credibility of the Bank of Canada’s flexible framework guided our rapid easing during the crisis. By providing forward policy guidance conditional on the outlook for inflation, we were able to reinforce the stimulative effect of our policy and to normalise policy smoothly when conditions improved.

Central banks at the centre of the crisis have responded even more radically. Inflation targeting is allowing the Bank of England to look through short-term deviations in inflation. The adoption by the US Federal Reserve and the Bank of Japan of more explicit inflation objectives improves the effectiveness of their unconventional policies, and will be essential to manage their exit from those policies.

But what of the assertion that price stability does not guarantee financial stability? No argument here: low, stable and predictable inflation can feed complacency and encourage risk-taking.

This is a cautionary tale for central banks in the non-crisis economies, which have relied on domestic demand in a weak external environment. With well-functioning financial systems, households have taken on more debt, and risk-taking in financial markets has grown. In short, a low-for-long world risks repeating the mistakes that led to the last crisis.

Fortunately, monetary policy does not operate in a vacuum. The first lines of defence against financial imbalances are sound supervision and regulation, which are being heavily fortified around the world, and will help reduce the risk of financial excess. Monetary policy can still play a complementary role in supporting financial stability in exceptional cases. The advantage of flexible inflation targeting is that it anchors inflation expectations over a varying horizon while central banks use monetary policy for stability purposes. Inflation can be allowed to run below target for a longer period than usual if tighter policy is warranted. In an unpredictable world, policy makers need a robust framework, one that remains appropriate no matter the circumstances.

Flexible inflation targeting is that framework, a policy for all seasons.