Multiple Objectives and Central Bank Tradeoffs under Flexible Inflation Targeting

Many inflation targeting central banks are facing calls to expand their list of policy goals. I discuss how recent research provides new insights into the goals of policy and the tradeoffs presented by multiple goals. I focus particular attention on the role of unemployment and labor market frictions, but I also discuss the role of currency misalignment in affecting policy objectives in open economies. Current models often find that price stability is close to the optimal policy, even when, in theory, the central bank should care about multiple goals. I offer some ideas about why this might be the case.