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Inflation Targeting In Practice — Brian Romanchuk

Summary:
I have been running into the ongoing debates on nominal GDP targeting, and whether it is superior to inflation targeting. To look at this debate, I need to put my “conventional economist” hat on, as if one accepts the heterodox view that interest rate policy is ineffective, the entire debate is pointless (neither policy “works”). As will become apparent, I think the neoclassical models behind the debate are dubious. But if we accept that interest rates at least sort-of work the way that they are conventionally assumed to (e.g., rate hikes dampen growth and inflation), we can have a view on how a change in targets would work in practice.That said, I am going to ignore nominal GDP targeting in this article, and push that to a later article. (I am still editing my manuscript, so my article

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I have been running into the ongoing debates on nominal GDP targeting, and whether it is superior to inflation targeting. To look at this debate, I need to put my “conventional economist” hat on, as if one accepts the heterodox view that interest rate policy is ineffective, the entire debate is pointless (neither policy “works”). As will become apparent, I think the neoclassical models behind the debate are dubious. But if we accept that interest rates at least sort-of work the way that they are conventionally assumed to (e.g., rate hikes dampen growth and inflation), we can have a view on how a change in targets would work in practice.

That said, I am going to ignore nominal GDP targeting in this article, and push that to a later article. (I am still editing my manuscript, so my article writing time is constrained.) So I will just be making some wild assertions about the behaviour of inflation targeting central banks without getting to why I brought it up. However, I think that this is a useful exercise for anyone who is concerned about central bank reaction functions. (If you are trading government bonds, even if interest rate policy does not work the way the neoclassicals believe, you still need to project what central bankers will do.)

Bond Economics
Inflation Targeting In Practice
Brian Romanchuk
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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