Essays On Inflation Targeting

Essays On Inflation Targeting-15
Since the adoption of inflation targeting and similar approaches, inflation in these countries has been relatively quiescent.

Since the adoption of inflation targeting and similar approaches, inflation in these countries has been relatively quiescent.The first column of Table 1 shows the average rates of inflation in a number of countries in the decade before the global financial crisis (1998–2007).

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It is important to note that, although inflation is front and center in each of these elements, inflation-targeting central banks also recognize a role for stabilizing economic activity—what is often referred to in the economics literature as “flexible inflation targeting.” Success at taming inflation has fueled wide adoption of inflation targeting (both explicit and implicit) over the past 25 years.

Since the breakdown of the Bretton Woods international monetary system in the early 1970s, most countries have faced bouts of high and volatile inflation as they sought a suitable nominal anchor.

Past regimes—including the gold standard, pegged exchange rates, and targeting monetary aggregates—all sought to do so, but proved to be fatally flawed when it came to providing the flexibility to deal with economic cycles and crises.

In a nutshell, inflation targeting is designed to anchor inflation expectations, enabling central banks to achieve greater macroeconomic stability in the short run, while ensuring price stability in the long run.

AID OF DIAGRAMS, ILLUSTRATE THE CAUSES OF INFLATION AND DEFLATION, AND BY COMPARING THEIR ECONOMIC EFFECTS CONSIDER HOW BOTH CAN AFFECT THE CORPORATE SECTOR.

The essay will describe causes of inflation and deflation and explain how they can affect the corporate sector. INTRODUCTION DEFINITION OF INFLATION AND DEFLATION Inflation is a process in which the price level is rising and money is losing value.

Today, some 20 central banks—representing economies from small to large, emerging markets to advanced—practice some version of inflation targeting.1 Approaches differ in the details, but it is striking how similar inflation-targeting practice is across a diverse set of countries with distinct economic and institutional landscapes.

Although the central banks of the three largest advanced economies—the Bank of Japan, the European Central Bank, and the Federal Reserve—don’t explicitly identify themselves as practicing inflation targeting, all three have enunciated numerical longer-term inflation goals, a cornerstone principle of inflation targeting.

Although the implementation of inflation targeting differs across countries, three elements are central to the framework.3 First and foremost is the announcement of an explicit quantitative inflation target coupled with the central bank’s assuming responsibility for delivering price stability.

Second is clear communication of the central bank’s policy strategy and the rationale for its decisions, which enhance the predictability of the central bank’s actions and its accountability to the public.

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