The central issue that remains is whether monetary authorities should be expected to go further than the prescripts of flexible, forward-looking inflation targeting would suggest. 22 If so, what form would it take? Should the inflation-targeting agreement itself, or the central bank’s reaction function, give explicit recognition to asset prices and credit growth? Would this prejudice the clarity of the current targets?
Would central bank credibility and accountability be sacrificed in the interest of achieving even greater policy flexibility? Carney (2009) has suggested that this problem might be overcome by combining flexible inflation targeting with price-level targeting.