The Rise of Inflation Targeting

Abstract

This paper discusses the interactions between politics and economic ideas leading to the adoption of inflation targeting in the United States. In the gold standard era, farmers' vulnerability to falling prices made price-level stabilization a salient political and social concern. Economists of the progressive era honed in on price-level stabilization as a key to promoting prosperity and social justice. Irving Fisher, in alliance with farm interests, helped members of Congress introduce price-level stabilization bills that, while unsuccessful, introduced the possibility that a price-level stabilization mandate might be a viable alternative to a gold standard. In the postwar years, the Great Inflation and Volcker disinflation set the stage for the rise of inflation targeting by highlighting the benefits of credibility, transparency, and expectations management. Tensions inherent in the implementation of inflation targeting—including its position in the “rules versus discretion” debate—have become more pronounced since the post-COVID run-up in inflation.

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