SF Fed study lauds benefits of inflation targets

Fri Aug 11, 2006 1:57pm ET168
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CHICAGO, Aug 11 (Reuters) - Countries with explicit inflation targets have done a better job at anchoring inflation expectations than the United States, a report from the San Francisco Federal Reserve said on Friday.

"Despite the generally superb performance of the U.S. economy and U.S. monetary policy over the past 15 years, there is still potential for improvement," said San Francisco Fed research advisor Eric Swanson.

The benefits of better-anchored inflation expectations could include lower, more stable long-term interest rates and ultimately a more productive and stable U.S. economy, he said.

The report cited the U.K., Sweden and Canada as countries where long-term inflation compensation -- reflected by inflation-indexed debt -- has not responded "systematically" to economic news since inflation targets were instituted.

"A natural interpretation of this finding is that the presence of an explicit numerical inflation objective has indeed helped to 'focus and anchor' private sector and financial market inflation expectations," Swanson said.

This supports the view than an explicit inflation objective would improve the anchoring of long-term U.S. inflation expectations, he said.

A potential move to specific inflation objectives, or targets, is expected to be debated over the coming months by Fed policy-makers as part of a broader overview of Fed communications.

Fed Chairman Ben Bernanke, a long-time advocate of targeting, tapped his deputy, Donald Kohn, to lead the panel, which also includes San Francisco Fed President Janet Yellen and Minneapolis Fed President Gary Stern.

Kohn has opposed inflation targeting in the past, while Stern has supported targeting. Yellen supports the adoption of an announced numerical inflation objective, which she distinguishes from a "target."

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