Inflation Targeting Is Unlikely the End of Monetary History

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The world economy may be on the cusp of a new phase in monetary policy, and some form of potentially addictive helicopter money could be in the mix, according to analysts at Barclay’s.

It’s a conclusion they draw in Barclay’s Equity Gilt Study 2019 as inflation targeting approaches its 30th birthday. That’s roughly the life-span of previous monetary regimes including the Gold Standard (1870s-1914) and the Bretton Woods fixed exchange rate system (1948-1973), the report says.

Yet even as the framework comes under increased scrutiny, rather than abandon it, central banks are more likely to become more tolerant of inflation below target or move toward average inflation targeting.

Still, when the next downturn arrives, simply reverting to quantitative easing or other unconventional policy alone won’t be enough and fiscal policy will need to play a role, the Barclays analysts argue.

That means aspects of some of the more radical monetary policy proposals floating around may come into play, including Modern Monetary Theory or helicopter money.

"The true challenge to these concepts are not theoretical flaws in the effectiveness of their mechanisms but rather human nature: once initiated, it is not hard to imagine how such seemingly ‘free’ spending power could become addictive to political decision takers."

For investors, that can mean more risk.

"Aggressive experiments that blur the boundaries of fiscal and monetary policy could eventually result in sudden and sharp upward adjustments in inflationary expectations, with related swings in risk premia, and exchange rates," the Barclays strategists wrote.

©2019 Bloomberg L.P.