Reading Comprehension

The framework that has organised monetary policy in much of the world since the early 1990s — an explicit numerical target for inflation, with the central bank's credibility staked on achieving it — was, at the time of its adoption, a deliberate response to the inflation episodes of the 1970s. The framework simplified what had been a discretionary, often confused set of objectives into a single anchor. The simplification, by most accounts, did much of what it was meant to do: inflation expectations fell, became more stable, and the cost of disinflation in the next downturn turned out to be lower than older models had predicted.

The framework's success has, of late, sat uneasily with developments it did not anticipate. The financial crisis of 2007–08 produced episodes of low or negative inflation that the framework's tools — primarily interest-rate adjustment — proved poorly suited to address; the subsequent decade of policy at or near the lower bound exposed limits that two decades of moderate inflation had concealed. The post-pandemic inflation episode then produced the opposite problem: the framework's nominal target was overshot in ways that older models, which had not been retired, would have anticipated more readily.

A growing number of economists have argued that the framework needs revision. Some recommend a higher target, allowing more room for interest-rate adjustment in the next downturn; some recommend targeting the price level rather than the inflation rate, so that overshoots and undershoots compensate over time; some recommend a broader objective that includes asset prices or financial stability alongside consumer prices. Each proposal addresses one weakness of the existing framework while introducing its own complications. None has, as yet, accumulated the consensus that would justify replacing the existing arrangement.

What survives, on the most careful reading, is a working framework whose limits are clearer now than they were a decade ago, and whose successor, if one is in fact needed, has not yet appeared. To defend the existing arrangement as if its limits had not been exposed by recent episodes is to ignore evidence the last fifteen years have provided in some quantity; to call for its replacement before a credible successor exists is to risk discarding a working tool for an aspiration whose costs are not yet fully understood. The honest position is to use the framework while continuing to study its limits, and to resist both the complacency that defends it unconditionally and the impatience that would replace it on principle.