6  See: Corbo V., Landerretche O., Schmidt-Hebbel K. “Does Inflation Targeting Make a Difference” in: Loayza N., Soto R. (ed.) “Inflation Targeting: Design, Performance, Challenges”, Central Bank of Chile, 2002. 7  Gürkaynak R.S., Levin A.T., Marder A.N., Swanson E.T. “Inflation Targeting and the Anchoring of Inflation Expectations in the Western Hemisphere”, forthcoming in Mishkin F., Schmidt-Hebbel K. (ed. ), Series on Central Banking, Analysis and Economic Policies X: Monetary Policy under Inflation Targeting (Santiago, Chile: Banco Central de Chile), 2006 and Gürkaynak R.S., Levin A.T. Swanson E.T. “Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the U.S., U.K., and Sweden”, Federal Reserve Bank of San Francisco Working Paper 200609, March 2006. 8  King M. “What Has Inflation Targeting Achieved?” in Bernanke B.S., Woodford M. (ed. ): The Inflation-Targeting Debate, NBER, 2005. 9  Strict inflation targeting implies monetary policy focused only on price stability. In contrast, “flexible inflation targeting implies that the central bank is not exclusively concerned about stabilizing inflation around the inflation target but is also concerned with the stability of the real economy, as represented by the output gap, the employment gap, or the unemployment gap.” – Svensson L. “Optimal Inflation Targeting: Further Developments of Inflation Targeting”, October 2005. 10  “Although inflation-targeting central banks normally acknowledge that they are flexible inflation targeters, they are normally not very explicit and transparent and probably not very consistent about the relative weight they attach to stability of other variables than inflation.” – Svensson L., op. cit.

This question basically relates to the Year-old discussion of “should the central bank prick bubbles or not?” Today asset price considerations are present in central banking practice in many countries – Norway, eurozone or Japan, to name just a few. Norgesbank speaks openly that when setting interest rates it does not ignore developments in asset and credit markets 17 and its inflation report contains an asset price forecast. The ECB’s president Trichet has in turn acknowledged that the monetary pillar of the ECB “contributes to assessing the extent to which excess creation of liquidity and over-extension of credit can be a driving force behind excessively valued assets […] and might reflect the inflating of an asset price bubble” 18 . Bank of Japan said in its “New Framework for Monetary Policy” that “risk factors include […] generating an asset price bubble” and that “in conducting monetary policy, the Bank needs to do its utmost to prevent the materialisation of such potential risks.” 19 A hot issue in today’s discussion about IT is transparency and communication. More and more economists realise that communication is the primary channel of central bank’s impact on the economy and monetary policy is increasingly becoming an art of managing expectations. Lars Svensson argues that current level of central bank interest rates matters very little for future inflation and economic activity, while Michael Woodford claims even that apart from expectations, little else matters 20 . For this reason inflation targeters put an ever larger weight to effective communication.