Overview On Inflation Targeting As A Monetary Policy Strategy

2887 words - 12 pages

INTRODUCTION

Since the 1990s, a large number of industrial countries and a growing number of emerging market and transition economies have adopted inflation targeting as their monetary policy strategy. During the implementation they face many challenges. However, there is no established pattern so countries must learn along the way from one another and more importantly from their own experience.
This paper provides an overview on inflation targeting as a monetary policy strategy, necessary preconditions for its successful implementation, its advantages and disadvantages and issues and challenges that emerging market and transition economies face while defining and implementing this monetary policy strategy.

Inflation targeting as a monetary policy strategy

Macroeconomic policy of any country has several goals such as employment, economic stability, economic development and production growth. Those goals are achieved by appropriate fiscal and monetary policy led by “most important players in financial markets” , Central Banks. Healthy macroeconomic policy means healthy economy which can be achieved through one of three monetary strategies: monetary targeting, inflation targeting and implicit nominal anchor. Central banks are held highly accountable for the conduct of monetary policy and hitting the targets. In other words, those regimes appear to be highly transparent. Furthermore, what is common for these three strategies is that all three of them focus on price stability, which is, for most Central Banks of the world, the main goal of monetary policy. Not so long ago policy makers reintroduced the idea of targeting. They first introduced monetary targeting during the seventies and eighties, and later on in 1989 inflation targeting in New Zealand.
As defined by Mishkin, monetary targeting means that “the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a monetary aggregate” , but not at constant rate. Different literature suggests five criteria that describes and defines the spirit of inflation targeting: “1. Public announcement of a numerical target for inflation, 2. a commitment to price stability as the overriding goal of policy, 3. the use of an information-inclusive strategy, 4. Adoption of high levels of transparency, 5. Accountability.”
Even if inflation targeting was introduced in developed market economies, this monetary policy framework has been adopted by a growing number of emerging market and transition economies as well. According to IMF, in 2009 twenty six countries have been classified as inflation targeting. However, numerous empirical studies and far most important, practice showed that success of inflation targeting and its adoption varies across emerging market and transition economies since it depends on diverse factors such as economic structure and level of income for example. In brief, the exchange rate and financial crises in 1990s made inflation...

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