Time to reassess inflation targeting

Abstract

For over a generation, inflation targeting has been successful in managing inflation without reducing economic growth. But the economic environment is changing. No longer does the Reserve Bank need to lift rates to reduce demand. Today the Reserve Bank needs to deal with supply shocks that rapidly change how New Zealand firms organise activity. Increasingly that makes inflation targeting no longer fit-for-purpose. Instead, targeting income growth – the sum of inflation and economic growth – looks the best bet to deal with new economic conditions.