by David Beckworth
July 10, 2014
The Federal Reserve’s monetary policy relies on inflation targeting to help achieve its goals of price stability, full employment, and long-run economic growth. Yet inflation targeting as a monetary policy regime is inadequate, because it is unable to deal with large supply and demand shocks in the economy and contributes to financial instability. Inflation targeting should, therefore, be replaced with a more robust monetary policy regime: one that ignores supply shocks, but responds vigorously to demand shocks.