Commentary
Although inflation has been falling in most of the advanced economies, the rates haven’t reached the targeted values. All central bankers claim success but don’t know when their rate hikes will successfully control inflation. This uncertainty refers not just to the long-term but to the lack of any forecasting in the lead-up to the next policy meeting. Judged this way, central banks are now employing an entirely discretionary strategy.
I address the outcome goals before discussing whether the current approach is sound.
Firstly, in almost all monetary models, a central bank’s objective is to minimize the volatility of inflation and output. The standard measure for achieving success in monetary policy is the central bank’s ability to carry out this process. The timeframe for minimizing volatility needs to be implemented from the present time and extend toward the horizon. It is also preferable for measures to be adjusted by a discount factor….