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Inflation Targets Would Enhance Nation’s Prosperity

Specific inflation targets could help to enhance America’s productivity and prosperity, according to a Federal Reserve Bank of Cleveland economist.

Writing in the Bank’s Economic Commentary, Mark Sniderman, senior vice president and director of research, argues that by lowering inflation and making it more predictable, monetary policy can encourage long-range planning and support a better allocation of our nation’s resources. Sniderman points out that in the period from 1953 through 1965, inflation averaged less than 2 percent a year -- a relatively mild increase -- while real economic growth was robust, averaging slightly more than 3 percent.

Many observers believe the Federal Reserve has contributed to the strength and longevity of the current economic expansion by focusing on price stability. “If, as a nation, we could find a means for institutionalizing this type of policy,” Sniderman adds, “I think we would be pleased with the effects on our living standards over time.”

Sniderman points out that in recent years a number of other countries, such as Canada, Mexico, Sweden, and the United Kingdom, have adopted inflation targets. Doing so demonstrates this desire for a credible, nominal anchor for the purchasing power of their currencies. The U.S. has succeeded in reducing its inflation rate thus far without an explicit, mandated target, but the current policy framework lacks a way to anchor the dollar’s purchasing power. For that reason, says Sniderman, inflation-targeting systems are worth our time and attention.

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