Round-up of Monetary Policy and Inflation Targeting

I was a fan of inflation targets before the conference, so the discussion largely confirmed my prior beliefs. However, the conference also resolved one nagging doubt about current policy. This doubt concerns the practice of interest-rate smoothing discussed by Lowe and Ellis. I have suspected that this policy is suboptimal – that central banks move interest rates slowly because of some kind of inertia or timidity, causing unnecessary delays in policy. I am reassured by Lowe and Ellis’s finding that interestrate smoothing has only small effects on the variances of output and inflation. Their explanation makes sense: the policy stance that is relevant to the economy is measured over a long period, so the precise timing of adjustments is unimportant. I still doubt that there are major benefits of interest-rate smoothing, but there do not seem to be major costs either.