The Best Economic Environment for Inflation Targeting

Introduction: In the past two decades, a multitude of countries, including Canada and Australia have instituted â€Å"explicit inflation targeting† (Svensson, 1996, p.1) for fear of the high cost of â€Å"volatile inflation† (FreedmanLaxton, 2009, p. 6).Mishkin offered the definition of inflation targeting (IT). It is a monetary policy strategy intended to achieve price stability within a specific range (Mishkin,2000).As is concisely demonstrated by Mishkin, IT â€Å"establishes a transparent and credible commitment† to the precision of the future â€Å"numerical objective†(Mishkin,2008).Nonetheless, it is not a prudential policy. It is prone to encounter the predicament of â€Å"long and variable lags† of â€Å"implementing and monitoring† the policy (Svensson,†¦show more content†¦In general, an independent, transparent and credible central bank, â€Å"strong fiscal position†, sound financial system with rigorous regulation and supervisio n and flexible exchange rate is vital. Furthermore, a more effective strategy is supposed to â€Å"phase in† following successful disinflation (Mishkin, 2000, p.106-p.107). Why do these factors foster the best environment for IT? How can they fit into countries adopting IT? When it comes to the performance of IT, Scott Roger concluded,† There is certain disparity in performance between the low and high income countries during disinflation, but similarity during stable inflation† (Roger, 2009, p.16). (Figure4)It seems to me that two groups both have insufficiency in terms of the background of IT. With reference to the accountability of CB, the operation should be free from political influence and entail forward-looking gauge (Roger, 2009). In this respect, the New Zealand successfully brought down the inflation rate from above 10% to below 2% thanks to the independent implementation of CB and â€Å"hierarchical mandate for CB with price stability† (Orphanides,2009,p.4). Relating to the fiscal position, the surplus in fiscal balance guarantees the success of IT in Chile without the inclination of fiscal dominance followed by expansionar y monetary policy and the devaluation of currency in some developed countries (Mishkin, 2000).Show MoreRelatedHow Companies Maximize Profits1591 Words   |  6 Pagessupply, and analysing consumers’ demands. However, there are number of economic factors that hinder this operation. These factors are government regulations, rate of interest, exchange rate, trade cycles, general price level, employment and income, economic growth, and supply and demand. Economics consists of macroeconomics and microeconomics. The former analyses national economy and offers knowledge about the business environment (Samuelson Nordhaus 2010, p.5). Macroeconomics centres on the overallRead MoreTurkey, Ukraine, Russia, And Poland Essay859 Words   |  4 Pages1. 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