Inflation Targeting

In order to achieve price stability in New Zealand, the monetary policy Inflation Targeting was adopted in 1990. With the growth and success of this new strategy, Canada, the United Kingdom, Sweden, Spain and many other counties followed suit in the subsequent years ahead.

Inflation targeting is an economic policy in which a monetary authority such as the European Central Bank publicly announces what they are going to do in regards hiring or lowering the inflation rate. They estimate a percentage such as 2 percent a year and make a target inflation rate, then attempt to move the actual inflation rate toward that rate. Through the use of interest rate changes and other monetary tools inflation targeting is possible. Although inflation targeting has many advantages, some countries for see the many disadvantages of low economic growth and too much rigidity.

Many criticize the idea of inflation targeting and how there are disadvantages to this policy. An inflation target lacks the ability to send signals immediately to the public and then to the markets, therefore delaying signaling. The belief that inflation targeting imposes rigid rules on policymakers makes economics think there is too much rigidity. Low employment and the low growth in the economy is also a concern of some economists. Yet, the prime concern of inflation targeting does not solely focus on inflation and the potential for increased output fluctuations. Along side to the validity of these criticisms there are several advantages to inflation targeting.

The stability between inflation and money is not the primary success of this policy. It is with the central bank increasing its accountability; the transparency of the policy associated with inflation targeting has made the central bank vastly accountable to the public and the government. The primary advantage of inflation targeting is keeping the inflation rate low. The countries that adopted inflation targeting have drastically reduced their rate of inflation and have kept it down till this day.

By not focusing completely on inflation and keeping the inflation rate low, critics can see both sides of the advantages and disadvantages of inflation targeting. With over ten counties using this monetary policy of inflation targeting for now over twenty five years it is clear that advantages and disadvantages will arise and critics will have their say on what they think is best.