Inflation targeting in the light of lessons from the financial crisis

This paper surveys the changes triggered by the financial crisis and the theoretical and practical options for the renewal of the inflation targeting framework. While a comprehensive overview would be impossible to provide, it seeks to present the changes in the monetary strategy of Magyar Nemzeti Bank against this wider context. First, it describes in brief the inflation targeting framework, its key elements and the principles of how it operates in practice. The paper then explains criticisms of the inflation targeting framework in light of the financial crisis and the practical, strategic and theoretical innovations that these have led to. On this note, there follows a discussion of the options most widely adopted as solutions to the challenges and what proposals were made but never used. Finally, the paper provides an overview of the practical lessons learnt in recent years regarding these instruments in advanced and emerging economies. International experience demonstrates that inflation targeting continues to be one of the best practices of monetary policy and that its transformation during the crisis reflects heightened interest in considerations (e.g. financial stability) beyond the primary goal of the inflation target. Rather than including greater flexibility in its goals, the changes to the earlier framework of inflation targeting resulted in a transformed and augmented toolkit and institutional system that may remain an integral part of monetary policy and central bank practice. To prepare this survey for information purposes, the authors relied on working documents produced by the Monetary Strategy Department at the Monetary Policy and Financial Market Analysis Directorate of Magyar Nemzeti Bank