Handbook of Safeguarding Global Financial Stability

Chapter 34

Financial Stability and Inflation Targeting

K.N. Kuttner

Williams College, Williamstown, MA, USA

Outline

Introduction

The Separation of Monetary and Financial Policy

Does Price Stability Promote Financial Stability?

Does Price Stability Guarantee Financial Stability?

Does IT Constrain the Response to Financial Crises?

New Directions Following the 2007–09 Crisis

Further Reading

Introduction

Inflation targeting (IT) has become the monetary policy framework of choice since its adoption by the Reserve Bank of New Zealand in 1990. As of 2008, the International Monetary Fund classified 31 central banks as inflation targeters. Even the US Federal Reserve and the Swiss National Bank, which are not self-proclaimed inflation targeters, employ ...