Excess Implementation of Inflation Target

Excess Implementation of Inflation Target

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Weakness of Implementation of Inflation Target

There is some empirical evidence that inflation targeting according to its proponents’ claims is a more transparent monetary policy. Inflation targeting allows monetary policy to focus on domestic considerations and to respond to shocks to the domestic economy, which is not possible under a fixed exchange rate system. Also uncertainty conditions for investors are reduced and therefore investors can more easily take into account the possibility of changes in interest rate policy into their investment decisions. Better inflation expectations are able to give “permission to the monetary authorities for policies to cut interest rates outside the cycle”.

Transparency is one of the advantages of applying the inflation target. Central banks in developed countries that have successfully implemented inflation targets tend to “maintain public communication channels with communities”. For example, the Bank of England spearheaded the “Inflation Report” in 1993, outlining the bank’s view of both past and future inflation and monetary performance (outlook).

The US, although not a country that implements inflation targets until January 2012, the statement “The United States of Longer Policy Objectives and Monetary Strategy” cites clear communication benefits “facilitating good decision-making by households and businesses, reducing economic and financial uncertainty, enhance the effectiveness of monetary policy, and increase transparency and accountability, which is important in a democratic society “.

The explicit mention of the inflation target raises the central bank’s accountability and thus it is unlikely that the central bank will become the target for inconsistent time traps. This accountability is very important because even countries with weak institutions can build public support to become independent central banks. Institutional commitment can also protect banks from political pressure to engage in overly expansive monetary policies.

Econometric analysis by University of Greenwich economists found that the adoption of inflation targets resulted in higher economic growth, but did not guarantee stability based on their studies of 36 developing countries from 1979 to 2009.

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