474 PA R T V Central Banking and the Conduct of Monetary Policy relatively good working relationship that has existed between the Fed and the executive branch will always continue In a different economic or political environment, the Fed might face strong pressure to engage in over-expansionary policies, raising the possibility that time inconsistency may become a more serious problem In the past, after a successful period of low inflation, the Federal Reserve has reverted to inflationary monetary policy the 1970s are one example and without an explicit nominal anchor, this could certainly happen again Another disadvantage of the just it approach is that it has some inconsistencies with democratic principles As described in Chapter 15, there are good reasons notably, insulation from short-term political pressures for the central bank to have some degree of independence, as the Federal Reserve currently does, and the evidence does generally support central bank independence Yet the practical economic arguments for central bank independence coexist uneasily with the presumption that government policies should be made democratically, rather than by an elite group In contrast, inflation targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles and avoid some of the above problems The inflation-targeting framework promotes the accountability of the central bank to elected officials, who are given some responsibility for setting the goals for monetary policy and then monitoring the economic outcomes However, under inflation targeting as it has generally been practised, the central bank has complete control over operational decisions, so that it can be held accountable for achieving its assigned objectives The Fed s monetary policy strategy may move more toward inflation targeting in the future, particularly with the appointment of Ben Bernanke, who has been an advocate of inflation targeting (see the Inside the Central Bank box, Chairman Bernanke and Inflation Targeting) As a study aid, the advantages and disadvantages of monetary targeting and the other monetary policy strategies are listed in Table 18-1 TA B L E - Advantages and Disadvantages of Different Monetary Policy Strategies Monetary Targeting Inflation Targeting Implicit Nominal Anchor Immediate signal on achievement of target Simplicity and clarity of target Does not rely on stable money inflation relationship Does not rely on stable money inflation relationship Demonstrated success in United States Advantages Increased accountability of central bank Reduced effects of inflationary shocks Disadvantages Relies on stable money inflation relationship Delayed signal about achievement of target Lack of transparency Could impose rigid rule (though has not in practice) Success depends on individuals Larger output fluctuations if sole focus on inflation (though not in practice) Low accountability