Inflation Targeting

Essay by makalethUniversity, Bachelor'sB+, April 2007

download word file, 10 pages 3.0

"Since the early 1990s, a new monetary policy framework has evolved based on inflation targeting. But the absence of supply-side disturbances means that it has yet to be tested."What is inflation targeting and how can inflation-targeting countries be identified? Evaluate inflation targeting as a strategy to contain inflation. Is there sufficient flexibility to handle deflation, adverse supply shocks and other challenges?---------------------------------The world has entered a period of price stability since the early 1990's when many industrialised countries abandoned their exchange rate and monetary targeting policies to adopt a new framework, inflation targeting. Many developed and developing countries have followed suit and given their central banks the freedom they need to effectively run an inflation targeting strategy. All monetary policies come with both advantages and disadvantages, but most of inflation targeting's shortfalls can be managed if the policy is designed and implemented efficiently and effectively. Critics of inflation targeting argue that it lacks the flexibility to deal with shocks in the economy, especially on the supply side as the absence of supply-side disturbances in recent years has left it essentially untested.

Inflation targeting can be defined as monetary policy framework in which a country's central bank will set a clear numerical target for the inflation rate that they wish to achieve for a specific time period and announce their strategy to the public. The central bank will then attempt to reach its goals by utilising their control over interest rates to bring stability to the inflation rate as they wish. The main goals of the inflation targeting framework are to produce macroeconomic stability and encourage long term growth while keeping inflation low, positive and stable over the long-run.

In the real world, countries who have adopted inflation targeting can be identified by the presence of features associated with the inflation targeting...