inflation targeting essays

inflation targeting essays Between 1973 and 1987, the average inflation rate amongst industrialised countries was over 7.5 percent. This high level of inflation called for a new method of conducting monetary policy. With more and more countries shifting to a policy of inflation targeting (including Australia, New Zealand, Canada and the United Kingdom just to name a few) the inflation rate had dramatically fallen to below 3 percent in 1998-99 (Nessen & Vestin, 2000). The primary reason for these countries altering their monetary policy was the change in general consensus to a belief that price stability and inflation targeting should be the overriding, long-term goals of monetary policy, as they produce more favourable economic outcomes (Mishkin, 1997). Some of the reasons that the general consensus shifted to support price stability are the long lag times involved in monetary activism, the fact that there is no long run trade-off between inflation and unemployment, and also the time-inconsistency problem . When the idea of inflation targeting first arose, there was a certain degree of scepticism amongst some economists who believed that if output was not targeted by monetary policy, it would not be able to correct itself (that is, a belief that the short run Phillips curve is not vertical). However, the majority of governments and economists alike now agree that that GDP is largely self-correcting, and by striving to achieve price stability, they believe better economic outcomes will be produced. The argument against inflation targeting is usually held by those who believe the Phillips curve is flat or not vertical for a substantial period of time (Dornbusch, Bodman, Crosby, Fischer & Startz, 2002). This is a belief that achieving output and unemployment goals far outweighs the benefits of achieving a stable inflation rate. Until around fifteen or twenty years ago, a stable price level was seen as unattainable, and the best that could be hoped for was ...