Inflation Targeting and 'Leaning Against the Wind'

Abstract

Let me start from standard flexible inflation targeting, according to which monetary policy aims at stabilizing inflation around an announced inflation target and resource utilization around a long-run sustainable rate. Furthermore, let me for concreteness assume that the unemployment rate is a satisfactory measure of resource utilization, so stabilizing resource utilization means stabilizing unemployment around an estimated long-run sustainable rate. A main current question is, should standard flexible inflation targeting be combined with some degree of “leaning against the wind”, as discussed, for instance, by Smets (2013) and at this conference by the introductory remarks of NBP President Marek Belka.