E5, f33, o54 abstract the paper looks at the evolution of monetary policy in industrialized countries by evaluating two monetary policy strategies, monetary targeting and inflation targeting. The approach evolved gradually from earlier monetary policy strategies that followed the demise of the bretton woods fixedexchangerate systemmost directly, i believe, from the practices. Indeed, inflation targeters have argued that symmetrical inflation targeting helps central banks to stabilize real output, because in the face of a weak economy, an inflation targeter can ease more aggressively without being worried that the easing will cause inflation expectations to rise. The appropriateness of inflation targeting in south africa is examined. The caveats specify the types of supply shocks that are allowed to be. How did we get to inflation targeting and where do. Early proposals of monetary systems targeting the price level or the inflation rate, rather than the exchange rate, followed the general crisis of the gold standard after world war i. Inflation targeting is a monetarypolicy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability. The assumption is that the best that monetary policy can do to support longterm growth of the economy is to maintain price stability, and price stability is achieved by controlling inflation. Inflation targeting is a central banking policy that revolves around meeting preset, publicly displayed targets for the annual rate of inflation. Inflation targeting has been adopted in a number of.
Chart 3 shows that central banks that have adopted inflation targeting as a monetary pol icy framework have opted for different types of targets. Inflation targeting, employment creation and economic development. In recent years, an inflation targeting framework for monetary policy has been adopted in a number of. Inflation targeting and monetary policy in ghana journal. But there are other types of shock, supply or cost shocks. Mar 18, 2020 if the address matches an existing account you will receive an email with instructions to retrieve your username. Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the mediumterm and announces this inflation target. Among the list of those who have officially adopted inflation targeting in one form or. May 01, 2020 inflation targeting is a central banking policy that revolves around meeting preset, publicly displayed targets for the annual rate of inflation. Inflation targeting and monetary policy in ghana journal of. The key fact about monetary targeting regimes in germany and switzerland is that the targeting regimes were very far from a friedmantype monetary targeting rule.
What are the costs and benefits of inflation targeting. Inflationtargeting, flexible exchange rates and macroeconomic performance since the great recession thomas barnebeck andersen. Inflation targeting framework south african reserve bank. Irving fisher proposed a compensated dollar system in which the gold content in paper money would vary with the price of goods in terms of gold, so that the price level in terms of paper money would. Selin sayek boke december 2011 inflation targeting regime is appeared as a new approach to achieve price stability objectives of the central banks. If inflation is low and stable, then we say that there is price stability. In fact, one way to interpret inflation targeting at least in the case of countries that have. Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly. Why it works and how to make it work better william t.
E42,e43,e47,e52,e58 abstract inflation targeting is a monetarypolicy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has. This type of thinking was, for example, behind the bank of japans decision to formally adopt an it regime in early 20. Inflation targeting june 2019 department of economic research 1 t he bsp and p rice s tability 1. One of the more interesting developments in central banking in the past dozen years or so has been the increasingly widespread adoption of the monetary policy framework known as inflation targeting. The central bank does this to make you believe prices will continue rising. In recent years, monetary economists and central bankers have expressed growing interest in inflation targeting as a framework for implementing monetary policy. This article compares the inflationtargeting frameworks of 10 advancedeconomy central banks.
This is under debate within the fed, since inflation targeting is usually very successful in other countries because of its transparency and predictability to the. Inflation targeting is consistent with democratic principles. Pdf inflation targeting as a framework for monetary policy. Summers, and john david murray explain how the federal reserve decided on its 2 percent inflation target, why it may be time to change its framework for monetary policy. Under average inflation targeting, instead, monetary policymakers would seek to make up for a period of toolow inflation by allowing inflation to temporarily run above target so that, over a. Merits of inflation targeting in south africa 16 2. In the years 1990 to 1993, four advanced economies henceforth the pioneering countries new zealand, canada, britain and sweden adopted the inflation targeting regime. One hopes that most countries will have the good sense not to implement inflation targeting. This is because over time inflation targeting in practice has become flexible inflation targeting.
In the real world, explicit inflation targeting is. A central element of an it regime is the flexibility of the exchange rate. The response of shortterm interest rates to inflation shocks could increase or decrease, however, depending on the central bank type prior to it. Therefore, it is possible that the impact of inflation targeting on inflation and on other macroeconomic variables may arise through its effects on inflation expectations and on the expectationsformation process.
South africa has adopted flexible inflation targeting, wherein considerations for other macroeconomic variables are prioritized. Appropriateness of inflation targeting in south africa. The swiss began targeting the m1 monetary aggregate, but in 1980 switched to the narrower monetary aggregate, m0, the monetary base. Given this, formal inflation targeting was needed to. Advantages and disadvantages of inflation targeting 12 2. The inflationtargeting framework has sufficient flexibility to allow for the shortrun tradeoff between output and inflation. It discusses the practical issues that have risen in the operation of an inflation targeting framework, and highlights the five major features of a framework. The extent to which it does so in part reflects some design features of the inflationtargeting framework, such as targeting bands and the policy horizon, that have been adopted in practice in the inflationtargeting. An inflation targeting regime can accommodate a goal of output stabilization by having wide inflation target bands, long inflation target horizons, and explicit exemptions for supply shocks. State of the art inflation target 2012 bank of england. However, wage inflation and general price inflation continue to rise. Therefore, over the longterm, higher inflation would not benefit the economy through a lower rate of unemployment.
In this document, the governor is required to discuss whether the inflation. The key fact about monetary targeting regimes in germany and switzerland is that the targeting regimes were very far from a friedman type monetary targeting rule. Yet, it is important to realize that not everyone views inflation targeting as a strict rule. That is, inflation targeting does not anchor the price level p, but the expected and, eventually, the current rate of price increases. Monetary policy that is set to offset shortterm movements in inflation away from target referred to as strict inflation targeting will result in more volatility in output and other economic variables such as employment and the exchange rate.
In recent years, a number of industrialized countries have adopted a strategy for monetary p. Thus, the adoption of an inflation targeting regime does not necessarily require that price stability or low inflation be the preeminent goal of monetary. Inflation targeting has become the dominant monetary policy prescription for developing and industrialized countries alike. Initially adopted by new zealand in 1990, the norms surrounding the inflation targeting regime have. This paper offers a practical guide for the adoption of inflation targeting as a monetary policy strategy. Inflation targeting is a monetary policy where the central bank sets a specific inflation rate as its goal. Inflation targeting is frequently classified as a rule, which, if followed very strictly, could open it up to criticism see the discussion of the costs of inflation targeting that follows. Inflation refers to the rate of change in the average prices of goods and services typically purchased by consumers. From monetary targeting to inflation targeting columbia business.
This study indicates that inflation targeting is an appropriate framework for monetary policy, particularly when there is a dire need for reducing high and volatile inflation. One of the features of an inflation targeting framework is the greater degree of transparency it brings to monetary policy. Country experiences with the introduction and implementation. An overview, central banking, analysis, and economic policies book series, in. Published in volume 11, issue 2, pages 97116 of journal of economic perspectives, spring 1997, abstract. Economic fluctuations and growth, monetary economics. Pdf on jan 1, 2002, norman loayza and others published inflation targeting. Jul 10, 2019 inflation targeting is a monetary policy where the central bank sets a specific inflation rate as its goal. Inflation targeting was introduced in new zealand in 1990. Desing, performance, challenges, edition 1, volume 5, chapter 1, pages 001022, central bank of chile. A groundbreaking study that will be likely to have a major impact on the debate over the right monetary strategy for the coming years. Since the adoption of formal inflation targets it by new zealand in 1990, the framework has become popular for the conduct of monetary policy in many countries.
Lessons from the crisis, organized by the netherlands bank, amsterdam, 21 september 2009. It spurs the economy by making you buy things now before they cost more. On the surface, this record suggests that inflation targeting has been effective in sustaining price stability in korea. The initial target measure was the cpix, which was defined as the consumer price index for metropolitan and other urban areas, excluding the interest cost on mortgage bonds. Pre conditions of inflation targeting baser, sefika ma, department of economics supervisor. May 19, 2019 however, wage inflation and general price inflation continue to rise. Gavin abstract inflation targeting has worked so well because it leads policymakers to debate, decide on, and communicate the inflation objective. Inflation targeting, may 2007, in the new palgrave dictionary of economics, 2nd edition, edited by larry blum and steven durlauf, forthcoming, pdf. Exchange rates, an important information variable under the inflation targeting, can be more volatile in a small open economy under inflation targeting than under exchange rate targeting. Many of the countries studied proved that inflation targeting had made a positive difference to their economies.
A short history of inflation targeting in the united kingdom. Explicit inflation targeting has been adopted by a number of central banks around the world, including those in australia, canada, finland, israel, new zealand, spain, sweden, and the u. The evolution to inflation targeting occurred because central banks, most. Since then, the annual rates of inflation in terms of the cpi and core cpi have remained around 34%, mostly within the target ranges. Inflation targeting, employment creation and economic. Country experiences with the introduction and implementation of inflation targeting prepared by charles freedman and inci otkerrobe1 authorized for distribution by inci otkerrobe july 2009 abstract this working paper should not be reported as representing the views of the imf. A final shortcoming of inflation targeting is that it requires judgment calls. Adoption of the inflation targeting regime globally and.
As many countries currently think of adopting inflation targeting in one form or another, the arrival of this book could not be more timely. This paper surveys the adoption of inflation targeting regimes in the world and in israel. Inflation targeting in practice wp9735 international monetary. One of the features of an inflationtargeting framework is the greater degree of transparency it brings to monetary policy. Pdf the two major prerequisites for adopting inflation targeting are a degree of independence of monetary policy and absence of commitment to a. Inflation targetings inability, then, to restore full employment was a result of its inability to resolve the problem of excess money demand during this time. Inflation is typically defined as the annual percentage change in the consumer price. In particular, it assesses how new zealands policy targets agreement compares to other advanced economy inflationtargeting frameworks and how the specifications in each framework compare to the actual practice of each central bank. These documents were approved in september 1998, and at the same. In practice, this process has led the public to believe that the central bank has a longterm inflation objective. Oca conditions, but the empirical evidence presented in the document shows a more promising picture at subregional level.
Lessons from the industrialized countries frederic s. This form of informal inflation targeting succeed in bringing the inflation down to the lower levels in south africa, but the system of informal inflation targeting at times created uncertainties among the public about the monetary policy stance adopted by sarb. Inflation targeting is a monetarypolicy strategy that is characterized by an. In discussing operational design, the author explains, among other things, that. Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the mediumterm and announces this inflation target to the public. In the early 1980s, they fell under the spell of monetarism, a simplistic economic theory promoted by milton friedman.
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