javier guzman calafell : inflation targeting remarks by mr javier guzman calafell, deputy governor of the bank of mexico, during the session “ inflation targeting ”, conference in honour of john d murray, bank of canada, ottawa, ontario, 26 august 2014. * * * the views expressed in this document are strictly personal and do not necessarily coincide with those of banco de mexico ’ s board. first of all, i wish to thank the organizers for their kind invitation to participate in this conference in honor of john murray. i met john at the banco de mexico nearly thirty years ago. since then, i have had the privilege of enjoying his friendship and his professional wit. nobody in this room will be surprised if i say that i always admired john ’ s capacity to analyze all sorts of complex subjects and put them in what appeared to be a rather simple and interesting way. but i confess i have learned at least as much from his always humble, open and enthusiastic attitude towards life and friendship. both from a personal and a professional perspective, the space that is being left by john at the bank of canada and at international fora is going to be very hard to fill. i am truly delighted to share this panel with such distinguished members, and to have the possibility to express some views on monetary policy under inflation targeting, a subject to which john has contributed a lot. i will focus my remarks on some of the challenges faced by inflation targeting at the current juncture, and on the mexican experience with this regime. more than twenty years after inflation targeting ( it ) was first adopted by the reserve bank of new zealand in 1990, the global financial crisis has given rise to a heated debate about the merits of using this framework for the conduct of monetary policy. 1 it has been claimed that adherence to an inflation targeting regime may have prevented central banks from setting a monetary policy accommodative enough to accelerate the pace and strength of recovery from the crisis. 2 in addition, some have claimed that inflation targeting is at least partly responsible for the current problems in the world economy, while others have concluded that this regime can increase the likelihood of a crisis. 3 the main argument is that by placing an excessive emphasis on price stability, central banks under inflation targeting regimes have not paid enough attention to financial system vulnerabilities. in my opinion, the recent criticisms to inflation targeting are quite feeble. to start with, it is essential to recall that one of the main objectives of inflation targeting is the anchor

but not a sufficient condition for financial stability. therefore, the need to look for adequate instruments to preserve financial stability has become imperative after the crisis. given the far reaching effects that the main monetary policy tool, i. e. the reference interest rate, may have on the broader economy, the use of more targeted measures specifically designed and implemented for this purpose is required. macroprudential policy is clearly a natural candidate for this task. unfortunately, the use, as well as the scope and effectiveness, of such policies are still, to a great extent, unchartered territory, highly in need of further research and institutional adjustment. i would underline in particular the need for enhancing the theoretical foundations for macroprudential policy, and more specifically the relationship of the financial system with the macro - economy ; for a better understanding of the interactions between macroprudential and other policies, particularly in the monetary field ; for further empirical work on the effectiveness of macroprudential tools ; and for establishing adequate institutional mechanisms for the design and implementation of these policies. it is important to bear in mind that the complexity of financial stability, and the uncertainties that surround the use of macroprudential tools, imply the adoption of a complementary focus that includes, in addition to the latter, traditional monetary, fiscal, and microprudential instruments. as a consequence, central banks will often have to participate actively in the design and implementation of macroprudential tools. in addition, although normally this will see capistran, carlos, raul ibarra and manuel ramos - francia ( 2011 ) : “ el traspaso de movimientos del tipo de cambio a los precios : un analisis para la economia mexicana ”, banco de mexico working paper no 2011 – 12. see chiquiar, daniel, antonio noriega and manuel ramos - francia ( 2010 ) : “ a time series approach to test a change in inflation persistence : the mexican experience ”, applied economics vol 42 : 3067 – 3075. see banco de mexico ( 2013 ) : “ anclaje de las expectativas de inflacion de mediano y largo plazo ante choques de oferta adversos ”, in box 3 of the quarterly inflation report for january - march. bis central bankers ’ speeches not be the first line of defense, there may well be instances in which monetary policy will need to