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What Difference Would an Inflation Target Make?

By Robert L. Hetzel
Economic Quarterly
Spring 2005

Critics of an explicit inflation target argue that it would require additional fluctuations in real output and unemployment. I argue that theory and practice have shown this alleged dilemma to be a false one. However, an inflation target would demand more communication. The Fed would need to place an inflation target in the context of a policy rule that explains the strategy for achieving it. It would also need to communicate a model of the economy that clarifies the tradeoffs faced by monetary policymakers.

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