The case for adaptive inflation targeting: monetary policy in a hot and volatile world

Barmes, David, Claeys, Irene, Dikau, Simon and Pereira da Silva, Luiz Awazu (2024) The case for adaptive inflation targeting: monetary policy in a hot and volatile world. . Centre for Economic Transition Expertise (CETEx), London School of Economics and Political Science, London, UK.

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Abstract

Negative supply shocks caused by climate change and interconnected crises may increasingly fuel persistent inflationary pressures. Responding to these shocks with standard monetary tightening would involve significant trade-offs, including impacts on economic output, financial stability, fiscal space, income equality and the green transition. While flexible inflation-targeting (FIT) regimes have faced supply shocks in the past, central banks may encounter new challenges in assessing and responding to these trade-offs, particularly when it comes to long-term macroeconomic stability. Consequently, this report proposes the case for adaptive inflation targeting (or ‘adaptive-IT’), which aims to equip central banks with a framework, analysis and toolkit that enables them to better navigate these supply-side disruptions. The report reviews existing literature on climate change and price stability, considers the risk posed by more persistent climate-related inflationary pressure and explores the trade-offs, challenges and implications for monetary policy. It proposes a shift from flexible inflation targeting to adaptive inflation targeting. This would prepare central banks to navigate supply-side headwinds while enabling fiscal policymakers to take a proactive role in preventing and mitigating negative supply shocks.

Item Type:	Monograph (Report)
Official URL:	https://cetex.org/publications/
Additional Information:	© 2024 The authors
Divisions:	Grantham Research Institute
Subjects:	H Social Sciences > HG Finance H Social Sciences > HF Commerce Q Science > QC Physics
Date Deposited:	29 Aug 2025 23:04
Last Modified:	29 Aug 2025 23:04
URI:	http://eprints.lse.ac.uk/id/eprint/129331

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