Lecturer: Kenneth Kuttner (bio)

Questions for Discussion

• What are the essential elements of inflation targeting policy frameworks? How do those differ from frameworks based on exchange rate pegs? What about those central banks (like the Fed) that don’t fall into either of these two categories?
  
  
• Are there significant differences in specific elements of the policy framework among inflation targeters? Among exchange rate peggers?
  
  
• What is meant by a “policy rule”? And what does it mean for a central bank to exercise “discretion”?
  
• What is the difference between a “rule” and a “framework”?
  
  
• Should policy rules be followed mechanically, or should policymakers feel free to deviate from them as they see fit? Are there things other than output and inflation that the monetary authority should respond to?
  
  
• Is it really practical to base a policy rule on outcomes, such as output and inflation, rather than the policy instrument itself?
  
  
• To what extent is “time inconsistency”—the temptation to renege on previously announced policies—really an issue for central banks? If it were, what problems would it create? What are some possible solutions, and to what extent are these solutions incorporated into existing monetary policy frameworks?
  
  
• What is “credibility,” as the term is used in the context of monetary policy?
  
  
• To what extent does inflation targeting allow central banks to balance the (sometimes) conflicting objectives of output and inflation stabilization? What about an exchange rate peg?
  
  
• Why do inflation-targeting frameworks emphasize communication and “transparency”?
  
  
• For what sorts of countries does a hard exchange rate peg make the most sense?
  
  
• What are the advantages of moving from a “hard” peg to an intermediate exchange rate regime, like a crawling or basket peg? What are the disadvantages?
  
  
• What scope is there for adopting an inflation targeting framework and maintaining an exchange rate peg of some sort?

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