Credibility and Explicit Inflation Targeting
In his 2004 inflation targeting manifesto, Marvin Goodfriend described US monetary policy as implicit inflation targeting and advocated explicit targeting. Summarizing the 1965-2000 US inflation experience, he highlighted the importance of evolving Fed credibility, which accords with our recent work using a quantitative New Keynesian model. We define credibility as policy consistency with a publicly announced framework and develop two lessons theoretically. First, under explicit targeting, no conflict arises between flexible inflation targeting and maintaining/accumulating credibility. Second, implicit targeting reduces the effectiveness of expectations management and stabilization policy, as well as opening the door to costly inflation scare episodes
Lu acknowledges financial support from the RGC of HKSAR (GRF HKUST-16504317) The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.