Inflation Targeting

1797 WordsOct 24, 20068 Pages
It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern. In order to understand what inflation targeting is…show more content…
This is due to the structured decision making process of the framework. Thirdly, the central banks (Reserve Bank) accountability is improved along with discipline toward the monetary policy. (Dr E J van der Merwe, 2002) This is because clear targets are set which the Reserve Bank is forced to meet. Finally, due to the targets set because of the policy, expectations arise which facilitate a reduction in inflation. If these targets set are credible, they form the basis for future price and wage setting. (Dr E J van der Merwe, 2002) Advantages of inflation targeting Inflation targeting has numerous advantages as a strategy for monetary policy. Unlike an exchange rate peg, inflation targeting enables monetary policy to focus primarily on domestic considerations and to respond accordingly to the domestic economy. (Mishkin F, 2000). Inflation targeting has the advantage that a stable relationship between money and inflation is not critical to its success. The strategy does not depend on this relationship, but rather uses all available information to determine the most appropriate settings of the inflation rate for the monetary policy. (Mishkin F, 2000) Inflation targeting also has the key advantage that it is easily understood by the public and is thus highly transparent. As an explicit target for inflation is created,
Open Document