Kohn on Inflation Targeting (9/21/07)

Don Kohn gave a speech in Frankfurt yesterday at the German Bundesbank's 50th Anniversary conference on the "Success and Failure of Monetary Policy since the 1950s." The speech focuses on inflation targeting and asset price bubbles.

First, inflation targeting. The debate about whether the Fed should have an explicit inflation target reignited when Ben Bernanke became Chairman. Chairman Bernanke has been a strong supporter of inflation targeting. Vice-Chairman Kohn has been opposed to the idea. So it's interesting that in this speech Kohn seems to be warming up to the idea:

In many countries, ... price stability [is] pursued through the formal apparatus of an inflation target.... [T]he spread of such regimes has coincided with sustained low global inflation. In addition, no adopter of an inflation target has subsequently abandoned it....

Evidence has accumulated to suggest that stock prices, interest rates, and measures of inflation expectations seem to vary less in economies in which the central bank has an explicit long-run goal for inflation....

A formal inflation target represents a national embrace of a goal.... An important effect of such public acceptance of price stability is that it erodes the standing of those who would direct central bank action toward other ends. [I wonder who he's talking about.]

In the midst of this inflation-targeting lovefest, he interjects this caveat:

Before anyone jumps to the conclusion that Frankfurt is a stop on my road to Damascus, let this Saul state that for me the case remains open.

Wow... I'm almost giddy at what a great piece of Fedspeak that is. Doesn't it sound like he's at best noncommittal?

Note that he doesn't say "...let me state that the case remains open," instead he says, "let this Saul state..." Saul, or course, was the zealous persecuter of the early Christians in Jerusalem, who, while walking on the road to Damascus, was struck by lightning and received a revelation from God, thereafter becoming one of early Christianity's most fervent missionaries (St. Paul).

Now I may well be reading between lines that aren't there, but Don Kohn's speeches are usually very tightly written; he frequently says things obliquely, but he almost never says things unintentionally.

It sounds to me like Kohn is going do a Nixon-in-China on inflation targeting.



We'll tackle Kohn's thinking on asset bubbles in a subsequent post...