Economic Structure and Monetary Policy Design

In this paper, I consider the lessons recent academic research and historical experiences with monetary targeting and inflation targeting offer for the design of monetary policy regimes. The practical experiences with both monetary and inflation targeting suggest that successful policies have incorporated a great deal of flexibility. In principle, both monetary targeting and inflation targeting can ensure the economy has a nominal anchor and be implemented in a transparent manner that promotes accountability. However, a policy that focuses on a goal, such as inflation, is less sensitive to structural change and instability in the economy than is an intermediate targeting procedure such as monetary targeting. However, inflation targeting should not be interpreted as a commitment to an instrument rule such as a Taylor rule. Such rules suffer from the same sensitivity to structural change that intermediate targeting rules do. And, to date, inflation targeting central banks have been transparent with respect to only one of their policy objectives.