Inflation Targeting Is A Monetary Policy Framework That

1639 WordsApr 3, 20177 Pages
Inflation targeting is a monetary policy framework that commits the central bank to achieving low and stable inflation. Inflation targeting is a long-run goal for monetary policy. It was implemented due to the poor performance of exchange rate and monetary targeting. The central bank has an explicit numerical target for inflation rate, for the medium term and announces it to public which is around 2% in the UK. Monetary policy supports the long term economy growth by maintaining the price stability. The central bank can only control either interest rate or money aggregates. However, controlling the money supply is not effective as it only affects the economy in the short run. As a medium term strategy of monetary policy, in contrast to the…show more content…
Moreover, it also reduces the chances of the arbitrary redistribution of wealth which reduce the welfare loss. For example the publication of the Inflation Report by central bank in the UK. The former would give the central bank more scope to lean against economic imbalances and result in a more favourable trade-off between changes in inflation and in the output gap and also gives bank discretion over the times of interest changes. Having known the interest rates, lowers the uncertainty and maximizes the productivity. The low uncertainty will also make it easier for investors to respond and factor in likely interest changes into their investment decisions. Central bank adopting an explicit, numerical target range for inflation target increases the credibility.. The central bank is responsible in achieving the inflation target by adjusting the instruments. The central bank has the right to change the instrument which is known as instrument independence. Moreover, transparency is important for central bank and it can be obtain by letting the public knows about the strategies and the changes of the monetary policy . Transparency is important as it helps reduce uncertainty so it becomes easier for the central bank to achieve the inflation target, which can lead to improved credibility and accountability. The inflation targeting is imperative in developing countries and they have rather high inflation which makes it harder to
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