THE IMPLEMENTATION OF INFLATION TARGETING

 

 

 

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The Implementation of Inflation Targeting

  1. Introduction
  2. Inflation targeting strategy encompasses the explicit announcement by the central bank

that it will target the medium rate on a medium-term basis.

  1. The paper delves into assessing the roles of exchange rates in emerging economies that have entirely embraced the inflation-targeting strategy.
  2. One great factor that should be understood is that under this strategy, the interest rate is the primary monetary policy tool that determines activity and inflation (Öztürk et al., 2014).
  3. It has been established that the exchange rate is a critical monetary policy tool for emerging economies that have embraced inflation targeting than countries with advanced Article Error Ers economies.
  4. The policy was chosen because of the following two major reasons;
  5. Emerging economies with inflation-targeting strategies have been realized to be composed of rigid exchange rate arrangements.
  6. These economies often intervene regularly in the foreign exchange market than nations with advanced economies.
  7. However, these emerging economies are excessively prone to exchange rate shocks and suffer from less developed financial markets.

Thesis Statement: The paper assesses the implementation of the inflation targeting strategy as one of the monetary policies by discussing its contribution in light of the intended impacts, actual impacts, and if there has been any disparity between the two and explaining the reasons for the disparity.

II.

Discussion

  1. The contribution of Inflation-targeting theory may be assessed in terms of intended or actual impacts.
  2. Intended impacts of inflation-targeting theory – the intended impacts were composed of the following five key elements as elaborated below;
  3. An institutional commitment to price stability in the long-run basis

Frag. (Ers a. In the long run, price stability would only be achieved through the development of a nominal variable (Öztürk et al., 2014).

  1. Adhering to the nominal anchor is important as it serves to keep the nominal variable within a narrow range that aids in promoting price stability through the promotion of stable inflation levels.
  2. Price stability was successful within the German borders under the Bundesbank regulation.
  3. Despite keeping a check on the monetary expansion, the Bundesbank also pursued price stability by focusing on full employment and high output growth that would spur policy activism (Bernanke et al., 2018).
  4. Medium-term targets for inflation are exposed to the public announcement.
  5. In the mid-70s, several industrialized nations began engaging in monetary targets by embracing the following three elements;
  6. Reliance on information deployed by a monetary aggregate to execute the monetary policy (Bernanke et al., 2018).

ii.

Public announcement of medium-term targets concerning

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monetary aggregates.

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iii. High levels of accountability involving systematic deviations from

the monetary targets

Article Error (ETS Frag. TS

  1. Some of the benefits realized by monetary targeting within the conduct of

monetary policy are as briefly outlined below;

  1. Since the monetary aggregates are reported within short time lags, Article Error (ETS they are more likely to send important signals to both the public and markets on the initiatives of policymakers to keep inflation in control.
  2. The signals generated are important for fixing inflation

expectations.

iii. The targets also compel immediate accountability for monetary policy to keep inflation at manageable levels.

  1. However, monetary targeting was not successful in the US, Canada, and the United Kingdom because of the following reasons;
  2. Monetary targeting was not pursued seriously – the bank of Canada and England engaged in substantial game-playing that resulted in an allowance for base drift, and there was no regular announcement of targets (Bernanke et al., 2018).
  3. The high instability between monetary aggregates and goal

outputs, such as inflation

Wrong Form (ETS) Frag. ETS

Wrong prediction of the effects of inflation shocks on the

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economy.

Frag.

  1. An information-inclusive strategy is embraced and utilized in making monetary- policy decisions.
  2. The information-inclusive strategy is depicted in various countries that embraced the inflation-targeting strategy.

b New Zealand was the first country to embrace inflation targeting, which Article Error (ETS necessitated a reduction in the inflation rate from 17% to 5% (Powell, 2022).

  1. This compelled the New Zealand government to pass the New Reserve Act, which not only increased the central bank’s independence but also Missing”,” moved the country from the least independent to the most independent country on the list of industrialized nations.
  2. Canada was the second country to embrace inflation targets in 1991, followed by Israel in January 1992, then the United Kingdom in October of the same year, and Sweden and Finland in January and February of the subsequent year (Powell, 2022).
  3. Increased transparency through the communication of plans and desired objectives.
  4. There is frequent communication between central banks and the government regarding inflation targeting.
  5. The law outlines some of these communications, while others are undertaken through informal inquiries.
  6. Nonetheless, central banks that have embraced inflation-targeting strategy do not engage in public information campaigns but also in distributing glossy brochures and publishing inflation report-type documents (Powell,

2022).

  1. Increased transparency from the banks for attaining inflation targets.
  2. Various advantages were identified as reasons why inflation targeted superseded monetary targeting. These reasons are as outlined below;
  3. Inflation targeting does not heavily rely on a stable-money inflation relationship (Powell, 2022).
  4. The use of a variety of information necessitates the realization of a better policy framework.

iii. The public easily understands inflation targets due to changes in the prices of commodities.

  1. Inflation targets enhanced banks’ accountability because central

banks’ performance can now be measured more clearly.

  1. The actual impacts are coupled mostly with disadvantages, as outlined below.
  2. Puts too much weight on inflation as opposed to other goals.
  3. At this point, central banks begin ignoring more pressing issues like unemployment.
  4. Flexibility is reduced through the inflation target.
  5. It has been discovered that an inflation targeting strategy can Article Error (TS constrain policy in some scenarios that would otherwise be deemed appropriate (Powell, 2022).
  6. This mechanism can aid an economy in eradicating supply bottlenecks and any available shortages.

Conclusion

  1. The intended impacts had five components. These components were;
  2. An institutional commitment to price stability on the long-run basis
  3. Medium-term targets for inflation are exposed to the public announcement.
  4. An information-inclusive strategy is embraced and utilized in making monetary-policy decisions.
  5. Increased transparency through the communication of plans and desired objectives.
  6. Increased transparency from the banks for attaining inflation targets.
  7. The above components were enumerated concerning their implementation process.
  8. However, the actual impacts encompassed mostly disadvantages. The three disadvantages highlighted in the paper include the following;
  9. The inflation strategy kept too much pressure on inflation and neglected other goals.
  10. Flexibility was greatly reduced.

iii. Supply bottlenecks can be easily eradicated by embracing this strategy.

 

 

 

References

Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen, A. S. (2018). Inflation targeting.

In Inflation Targeting. Princeton University Press.

Öztürk, S., Sözdemir, A., & Ülger, Ö. (2014). The effects of inflation targeting strategy on the growth performance of developed and developing countries: Evaluation of pre and post stages of the global financial crisis. Procedia-Social and Behavioral Sciences, 109, 57- 64.

Powell, J. (2022). “Supply of Money,” Unit 2: Demand for and Supply of Money, 19 December. Powell, J. (2022). “Supply of Money,” Unit 2: Demand for and Supply of Money, 19 December. Powell, J. (2022). “The Exchange Rate,” Unit 5: International Finance and Monetary Policy, 19

December.