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The Ironies of Inflation Targeting

The use of inflation targeting as a way of helping central banks to stabilize the economy is currently met with a lot of questions whether it is really effective or not uncertain scenarios. The assumptions that are currently being placed with inflation targeting therein are proved to be only applicable under normal conditions and do not have the capability to adapt to changes that are brought about by certain tremors that may happen with the economy.

This may be due to the lacking performance and strength of standard exchange rate systems and economic indicator targeting among industrialized countries has brought back to life the particular principle of a more radical policy which particularly emerged all through the 1990s. This specific radicalism is but in general connected with the particular country’s central bank unrestricted utilization of the interest rate policies with the intention of steering straightforwardly towards the stability of market prices, in the form of lower and steady inflation rates.

With such a structure that is frequently referred to as inflation targeting, particular strategies has been officially introduced in a number of industrialized countries, such as New Zealand, Canada, Sweden, the United Kingdom, Australia, Norway and Iceland, industrialized countries whose central banks have been given specified open projections for inflation and the specific autonomous mechanism that sets the particular interest rate in order to attain specific inflationary targets (Blinder, 2006).

Inflation Targeting as a Successful Strategy In the effectiveness of monetary policies along with the manner of its implementation, could be enhanced by using an approach known as inflation targeting. In this particular strategy, the chief operational change would be to broadcast an unequivocal specific purpose for the setting of inflationary foundations over the medium term, particularly in about one or a couple of years.

As a component of the targeting process in the implementation sense, the Federal Reserve or any Central Banks for that matter would report to its respective Congress its outlooks and assessments for potential inflation rates in a specific time frame set, its primary rationale for any prospect lapses, and its predicted back-up strategy for bringing the inflation rate right back on track towards the attainment of its specific target (B. S. Bernanke, 2002).

Under such conditions, the Central Banks of such countries who uses an inflation targeting policy administers its mechanism and functional targets such as commercial banks’ demand deposits, adjustment of interest rates, and future demands on the price level of certain market outputs based on certain assumptions. This characteristics make the assembly of most important information about inflation be particularly significant for monetary policy executions (Leitemo, 2004). Inflation Targeting can be done in four primary ways.

First is through the public announcement of long-term inflationary targets comprising of a couple of percentages in consonance with the respective CPI of an industrialized country every now and then. This act aims to set a particular forecast and whose standard is set with the involvement of the respective government. Such a suggestion is aimed for specific point targets rather than a range (Armas, 2002). Second is the establishment of a clear regularity which revolves around the attainment of a specific target set by the Central Bank.

This gives a very small insignificant inflation rate and is aimed to be avoided as much as possible and thereby suggests a quadratic loss function (Armas, 2002). The third approach basically deals with having an annual announcement of a short-term inflationary target which may or may not differ itself from the establishment of a certain strategy that would entail a specific commitment phase to attain a predicted short-term inflationary target within a specified time of a couple of years at least (Armas, 2002).

The last way of strategizing with the inflationary targets is through the issuance of regular reports of inflation rates by the Central Banks of certain countries. Reports such as these could be done quarterly so as to particularly keep a watchful eye on the movement of inflation rates which in turn could also look after the prices of outputs in the market (Armas, 2002).

Furthermore, the success of certain inflationary targeting measures specifically utilized by certain countries in the recent times which can be attributed to the specific movement of economic indicators that could deem be useful which are also, at the same time, a pivotal standard for the effectiveness of these strategies and for the anticipation for projected inflation rates. Inflation Targeting Under Unfavorable Scenarios Inflation targeting in certain unfavorable scenarios, often ends up with the announcement to the public of a long-run inflationary target, which in turn could be either a mere fraction or a full range of predictions.

The failure of such policies could also be well considered as a total and full stop in economic movement. An instance wherein, inflation targeting could not well serve its purpose (B. S. Bernanke, et al, 1999). This becomes a problem when the economy is under a scenario wherein tremors are made. Under which in no time can there be a possibility for reaching the Central Bank’s specific inflationary targets. It also implies the absence of an interim short-run target to which the inflation target could fall back to.

There would also be no absolute “contract” with the government that could legalize or recognize such predictions and there would be no Inflation Reports. This by then would be a common and a standard assertion of the Central Bank’s dual mandate.

In the case of the United States, this version of inflation targeting in the aftermath of near-recession scenarios according to the definitions of both Larry Meyer and Blinder believe that such strategies is an impending towards the Fed (U.S. Central Bank) under the leadership of Chairman Bernanke wherein Blinder firmly believes that it doesn’t count that inflationary standard forecasting ought to forge the new chairman towards the long and arduous way of attaining such a goal. After which, the reforming of inflationary targets under such circumstances, could not be considered as a major downfall or blunder from where the US Federal Reserve particularly heads itself to.

Furthermore, the three variations of inflationary standards that most industrialized countries head their Central Banks to that can lead to unfavorable monetary conditions can be summarized into three kinds. With this, the recommendation that inflation targeting should be proved ineffective further broken down into three. First, through the assembly of the particular inflationary target as accurate and clear as possible is an effective pace in the attainment and direction towards greater transparency in the management of Central Bank policies.

Second, the respective Central Banks posting a concrete inflationary target would make the central bank more accountable for accomplishing their predictions which most of the time ends up being a blunder for the respective institutions. Additionally, what may every so often be the case in monetary conditions that are unstable such as recessions and depressions, the hardest part would be explaining why the central banks missed on their inflationary projections (Blinder, 2006).

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