Reflections on Operating Inflation Targeting

In this speech, Paul Tucker, Executive Director for Markets and a member of the Monetary Policy Committee (MPC) - sets out some reflections on the operation of an inflation-targeting regime after four years on the MPC. Addressing the key objectives of modern central banking and how they may be met, the central role of anchoring medium to long-term inflation expectations is emphasised. On the second element in the conduct of policy - stabilisation of the path of demand and output, to help meet the inflation target and as worthwhile in its own right - he argues that quot;rough tuningquot; is a more feasible objective than attempts at fine tuning, in the face of limited knowledge about structural change in the economy and inevitably imperfect data. Turning to four issues of strategy for modern policymakers, he offers some comments on whether central banks should publish an expected policy path; on whether there is a time-consistency problem in their operation of stabilisation policy; on whether price-level targeting could make stabilisation policy more effective; and on how central banks should respond to asset prices. A thread running through the speech is that the successful operation of policy requires straightforward communication by central banks about policy objectives and the conduct of policy, without glossing over uncertainties and risks