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The Rba And Inflation Targeting Essay

571 words - 2 pages

The RBA claims that inflation targeting is consistent with its obligation to 'secure full-employment'? Why? What are the problems with this argumentInflation targeting is the conduct of monetary policy to achieve a given inflation rate over time. The RBA has an inflation target between 2-3%; this allows the RBA to balance the tradeoffs between inflation and employment. In order to maintain this inflation target the RBA must try to keep aggregate demand as close to its expected or potential natural rate of output. In order to do this the RBA strives to keep the rate of unemployment as close as possible to the natural rate of unemployment; the natural rate of unemployment is the rate of unemployment required to keep the inflation rate constant. If inflation is constant then inflation in the present year is equal to the inflation in the last yearTherefore in the medium run, the unemployment rate must be equal to the natural rate of unemployment. The medium run interest rate is affected by shocks to demand and supply. The medium run Phillips curve gives output at its natural rate and this is shown as the LRPC. The LRPC displays that there is an assumption that demand management can affect inflation, however demand management policy's cannot permanently reduce the rate of unemployment below the natural rate of unemployment.In Australia, the natural rate of unemployment has decreased to less that 6% which is quite similar the actual rate; this displays the effectiveness of the RBA's inflation targeting.However the main problems with inflation targeting is that it disregards the problems of supply shocks and as a consequence cannot control the adverse outcomes of these shocks. A supply shock will often result in an increase in inflation and a...

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