What Data Can You Use to Support Your Arguments?
Central banks around the world have adopted inflation targeting. Countries indulging in inflation targeting have more developed and emerging markets and developing economies. These countries are determined to ensure a full-fledged commitment to meet specific inflation rates within a specified time frame. According to Skinner (2020), the involved countries then publicly announce their targets regularly within institutional arrangements margins ensuring that central banks get accountable for meeting their targets. One of the first countries to adopt inflation targeting in 1990 in New Zealand, with inflation rates ranging between 1-and 3. Countries like the United Kingdom adopted an inflation target in 1992 with 2 point inflation target. According to the International Monetary Fund’s annual report database, countries like Russia that adopted inflation targeting in 2015 had inflation rates of four at inception.
However, Andrade (2018) notes that countries such as Spain, Finland, and the Slovak Republic had their central banks stop inflation targeting as soon as they started adopting the euro as their domestic currency. On the other hand, countries like Hungary, the Czech Republic, and Poland adapted inflation targeting while transitioning from centrally planned to market economies. The European Central Bank and US Federal Reserve have adopted inflation targeting but do not consider themselves inflation targeters. These banks commit low inflation rates while others do not announce numerical targets. For example, the International Monetary Fund database explains that a country like the United States of America explicitly adopted a 2% inflation rate in 2012.
Are there any other Targets that are Important? Should they Replace Price Stability?
Economists and policymakers have the staunch belief that inflation targeting is the foundation of monetary policy. As McDermott (2018) explains, inflation targeting got implemented by the Reserve Bank of New Zealand in 1988. Many central banks globally adapted the notion that inflation targeting is the guiding principle. However, most countries do not grasp that inflation targeting will change because of notable and significant flaws in inflation targeting. It is because recently, the world gets driven by productivity. The other main reason is an adverse problem with many countries having enormous government debts. In the beginning, inflation targeting got viewed as a guiding principle giving central banks an explicit policy goal. However, it was significant for central banks to achieve inflation targets because they were vital to attain monetary policy.
Additionally, they were significant because they provided insight into policy expectations. However, the well-known problems related to inflation targeting lie in the supply shocks. They do not work well and instead induce output volatility, proving that inflation targeting is not the best framework for central banks following these circumstances. Chen (2020) confirms that other significant targets include standard GDP targeting, which sums up inflation and real GDP growth. Standard GDP targets are essential and work well because a recorded fall in productivity translates to a rise in input costs. Central banks using inflation targeting would adjust and tighten the policy responding to the inflation. It will ensure that the economic outcome is better without undermining a clear policy rule amid expectations. The other significant target is countries with high ratios of nominal debt to normal GDP. It is paramount for central banks to tighten fiscal policies that will ensure debt levels decrease in many countries. Decreased debt levels combined with decreasing GDP growth mean that the nominal debt to GDP ratio may rise even when fiscal policies seem under control. In reality, price stability should replace inflation targeting because the world’s economy will improve.
Central banks in many countries need to shift their focus from inflation targeting, ensuring that the monetary policy in the future will change. Central banks get obligated by ensuring that prices remain stable in the changing economic landscape. Central banks should have a standardized inflation rate of 2% to achieve price stability. The world’s economy functions well when prices are stable because they maintain money value. Maintained money value ensures that the economy grows, creating jobs and prosperity. Today’s economic landscape differed from when inflation targeting got initiated in countries. Inflation targeting should not get scrapped, but inflation should get prevented from getting too low instead of focusing on high inflation rates. Aguir (2018) highlights that inflation targeting and price stability dictate how economies work, and at times these developments cannot get controlled by central banks. Price stability is vital and needs to get guarded against either too high or too low inflation. It is why central banks are aiming at inflation rates of 2% over the medium term. Understanding inflation targets is significant because it helps people visualize future price changes and makes it easier to plan and aim for what they want. This strategy achieves price stability by steering the economy in the right direction.
What are the Differences between Developed and Developing Countries?
In economic capacity, there are significant differences between developed and developing countries. Emerging markets and developing countries in line with developed economies have witnessed a remarkable decline in inflation rates. However, there are differences between the two countries that distinguish how both economies operate and survive harsh inflation times. In developing countries, inflation is evolving and getting synchronized with the economies of these countries. These countries have understood inflation policies and capitalized on anchoring them that ensures price stability. Khan (2020) argues that, unlike developed countries, developing countries survive currency fluctuation rates during inflation seasons. Developing countries continue experiencing decreased inflation rates after surviving high inflation over the past two decades. Unlike developed countries, developing countries have deployed advantageous tactics that steer their economies in the right direction by implementing the best policies. Emerging economies also have frameworks that predict whether they will endure challenges, especially when unfavorable global financial conditions. Adverse conditions include emerging market currencies and monetary policies.
Developed countries can counterattack inflation expectations, unlike developing countries. Developed countries also ensure that their prices remain stable while facing the currency exchange rates. On the other hand, developing countries are vulnerable to regular high inflation rates that destabilize prices and affect the population and the economy. However, it is vital to note that developed countries still manage to conquer these increased rates despite the high inflation shortcomings. Mischenko (2018) adds that some developing countries get neglected, resulting in adverse effects that destabilize prices and the economy. These countries, unlike developed countries, are incapable of handling the inflation menace that ends up crippling the economy. It is paramount for central banks in developed and developing countries to tackle the inflation phenomenon to boost and stabilize the global economy.
Is the World Economy the same as it was 30 Years Ago when Inflation Targeting was Established? Should central banks take this into account and how?
The global economy has since changed from the moment target marketing was introduced in 1988 and adapted in 1990. Inflation targeting has not worked, nor has it prevented the global financial crisis. Over three decades later, inflation targeting still lacks solutions to get the global economy out of the crisis by providing efficient monetary policy strategies. Unfortunately, the world economy y continues to plunge deeper into crisis compared to thirty years ago when it was stable. As Taylor (2019) explains, central banks’ only option is to abandon the inflation targeting schemes and all their variants to ensure a stabilized global economy. However, it is crucial to note that if central banks dismantle inflation targeting, there are consequences that will follow. These consequences include bidding goodbye to central banks’ transparency, accountability, and independence. In this case, compromised transparency will lead to unexpected higher inflation rates, fundamental in growth stimulation and redistribution of income between debtors and creditors.
In addition, ending inflation targeting means that central banks will lose their independence because of redistributive policies, and they will remain limited in making any welfare choices. On the other hand, central banks should consider the advantages of ending inflation targeting, like understanding that inflation targeting under proper monitoring will ensure monetary and financial policies remain effective. Central banks should assume that the significant economic change is deadly, and erasing inflation targeting would ease pressure on governments that aid in making tough decisions regarding performance improvement of developed countries.
References
Aguir, A. (2018). Central bank credibility, independence, and monetary policy. Journal of Central Banking Theory and Practice, 7(3), 91-110.
Andrade, P., Galí, J., Le Bihan, H., & Matheron, J. (2018). The optimal inflation target and the natural rate of interest (No. w24328). National Bureau of Economic Research.
Chen, H. (2020). Nominal GDP targeting, real economic activity and inflation stabilization in a new Keynesian framework. The Quarterly Review of Economics and Finance, 78, 53-63.
Khan, M., & Hanif, W. (2020). Institutional quality and the relationship between inflation and economic growth. Empirical Economics, 58(2), 627-649.
McDermott, J., & Williams, R. (2018). Inflation Targeting in New Zealand: An Experience in Evolution| Conference–2018.
Mishchenko, V., Naumenkova, S., Mishchenko, S., & Ivanov, V. (2018). Inflation and economic growth: The search for a compromise for the Central Bank’s monetary policy. Banks & bank systems, (13, Iss. 2), 153-163.
Skinner, C. P. (2021). Central Bank Activism. Duke Law Journal, 71.
write