mr gramlich focuses on inflation targeting remarks by mr edward m gramlich, member of the board of governors of the us federal reserve system, before the charlotte economics club, charlotte, nc on 13 january 2000. * * * at one time or another, opinions on how central banks should operate have focused on fixing exchange rates, stabilizing the rate of growth of the money supply, smoothing the growth of nominal income, or setting short - term interest rates through an instrument rule. but lately both academic economists and central bankers have become enamored of a new procedure that may have more staying power than these other approaches and that has certainly been more widely adopted around the world. called inflation targeting, this new procedure essentially commits a country ’ s central bank to hit an inflation target, usually expressed as a low, positive rate of inflation subject to some margin of error and some allowance for outside price shocks. new zealand was the first country to adopt a formal inflation targeting regime back in 1990. it was soon followed by canada, the united kingdom, sweden, and australia. the european central bank at least alludes to inflation targeting in its strategy statements, as do many countries in eastern europe that aspire to join the european union. at least ten emerging - market countries have adopted inflation targeting as a way to correct persistent inflation problems. in the last few months alone, turkey, switzerland, and south africa have announced that they are switching to inflation targeting. when tallied up, the number of countries on either a formal or an informal inflation targeting regime now approaches thirty. perhaps more meaningfully, there seems to be no country that has first tried inflation targeting and then abandoned it. one apparent holdout is the united states. while us central bankers have often stressed the paramount importance of controlling inflation, the united states has never adopted a formal inflation target or an inflation targeting regime. the federal reserve operates under the federal reserve act, which requires the fed to try to achieve maximum employment along with price stability. but both in the academic community and in the halls of the congress, there are advocates for change. in a series of articles and books, bernanke, laubach, mishkin, and posen ( 1999 ) have proposed that the united states adopt an explicit inflation targeting regime. senator connie mack has introduced a bill to this effect in the congress, so far not adopted. recognizing that the question of whether the united states should adopt inflation targeting is ultimately a congressional prerogative, one could still ask

many others ) that, when nominal interest rates are at or near zero, the central bank can lower the real rate of interest only by creating expectations of inflation on the part of the public. eggertsson and woodford argue that a publicly announced price - level target of the type just described is more conducive to raising near - term inflation expectations than is an inflation target. one way to understand their argument is to imagine that the public expects the leaders of the central bank to take more aggressive actions, the further they are from their announced objective. now suppose that, in an economy experiencing a stable deflation, the central bank leadership announces a fixed inflation target but then makes no progress toward that target during a given period. then in the next period, the central bank is in the same position as previously, in terms of its distance from its objective ; hence, by hypothesis, the central bank has no incentive to increase its effort to meet the announced target, and the public has no reason to expect it to do so. in this respect the inflation target is too " forgiving " an objective ; failure is not penalized, nor is greater effort demanded. in contrast, under a price - level - targeting scheme, continuing deflation combined with an upward - sloping path for the price - level target causes the size of the price - level gap to increase over time. thus, failure by the central bank to meet its target in a given period leads to expectations of ( and public demands for ) increased effort in subsequent periods - greater quantities of assets purchased on some differences between inflation targeting and price - level targeting are interesting but they need not detain us here. see cecchetti and kim ( 2003 ) for a comparison. in my view, most contemporary inflation - targeting regimes actually practice a combination of inflation targeting and price - level targeting ( or price - path targeting ), in that overshoots or undershoots of inflation are usually partly, but not entirely, subsequently reversed. wolman ( 1998 ) provides an earlier analysis with a similar conclusion. the open market, for example. so even if the central bank is reluctant to provide a time frame for meeting its objective, the structure of the price - level objective provides a means for the bank to commit to increasing its anti - deflationary efforts when its earlier efforts prove unsuccessful. as eggertsson and woodford show, the expectation that an increasing price level gap will give rise to intensified effort by the central bank should lead the