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How Central Banks Use Inflation Targeting to Anchor Expectations
Description
Episode 6 of Monetary Policy Explained with Fexingo dives into inflation targeting — the framework adopted by central banks worldwide to anchor expectations and stabilize prices. Lucas and Luna explore how the Reserve Bank of New Zealand pioneered the first inflation target in 1990, setting a 0-2% band that evolved into the modern 2% target used by the Fed, ECB, and others. They discuss why explicit targets matter for credibility, how they guide wage and investment decisions, and what happens when central banks miss their targets — as many did after the COVID-19 pandemic. The episode also covers the role of communication in shaping expectations, the difference between core and headline inflation, and whether the 2% target should be raised in a structurally different economy. Expect concrete examples from New Zealand, the US, and Japan, plus a look at how the Fed's flexible average inflation targeting (FAIT) worked in practice. No prior economics background needed.