Mark Thoma is all over reports (here and here) of a new article by Steve Cecchetti, Peter Hooper, Bruce Kasman, Kermit Schoenholtz, and Mark Watson, claiming that most explanations for observed inflation patterns of the past four decades are probably wrong. MT says "I will be among those defending inflation targeting", but on my quick reading the Cecchetti et al study does not seem to support that position. To begin with, there is this:
... the beginning of the Great inflation [in G-7 countries] clusters in a very narrow time frame between 1Q 69 and 2Q 70 (with the exception of France in 2Q 63) while the Inflation Stabilization occurs in the period between 1Q 82 and 2Q 86, with the notable exception of Germany (4Q 69) and Japan (4Q 79).
I sort of doubt that anyone is surprised by this particular information, but it does remind us that the Great Inflation of the 70s was reversed well before inflation targeting came into vogue. Furthermore, the study does not change the impression that the experience of inflation targeting countries has not been demonstrably different from that of countries without inflation targets:
The statistical analysis in this paper... approximates inflation as the sum of a persistent and transitory component. The persistent component captures the trend in inflation, while the transitory component captures deviations of inflation from its trend value... The variability of both the trend and temporary components are allowed to change over time...
In recent years, the trend volatilities have fallen so low across the G-7 that such univariate measures no longer distinguish between the inflation dynamics in these countries, regardless of whether their central banks target inflation.
The conclusion, in fact, is that actions speak louder than words:
... the policy regime analysis suggests that the current low persistence of inflation is itself the a result of the rule-like behavior that has predominated since the 1980s. If the credibility dividend of the low-inflation era were to foster policy complacency inf the face of unpleasant inflation news -- or if perceptions of political interference in policy-setting were to arise -- then the volatility of trend inflation could rebound.
In other words, "just do it" -- and keep on doing it.
UPDATE: Mark responds, in an update to his original post, with a little help from The Economist:
Neither the Taylor rule, inflation targets nor any other bits of the modern central bankers' toolkit were necessary to end high inflation. But the scholars think these tools have helped to keep inflation down...
Granted -- that's the rule-like behavior that Cecchetti et al emphasize. Such rules, of course, must embed discernible objectives if they are to have any meaning at all, even if those objectives are left unwritten. If inflation targeting is defined to encompass implicit as well as explicit objectives, then there isn't much debate. However, I'm assuming that support for inflation targeting suggests a preference for explicit (and quantitative) declarations. I don't think this particular study provides much of a case (if any) for the value of providing that extra detail.
UPDATE II: Mark confirms (in the comment below and in email correspondence) that he was indeed referring to inflation targeting in the broader sense of acting in a consistent manner toward a stable inflation objective. On that, I think the Cecchetti et al paper does support his position -- a position that I share.