inflation targeting
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 sh
Inflation targeting has greatly improved economic performance in Australia, with a steady inflation rate and thus stable prices allowing for more predictable conditions and a stronger monetary policy. au/PublicationsAndResearch/Conferences/1997/Mishkin. , "The evolution of Monetary policy: From money targets to inflation targets", 1997. , "Strategies for controlling inflation", 1997. A second argument against monetary activism was the discovery by Monetarist Milton Friedman that there was a fundamental error in Phillips-curve analysis; expectations of inflation were not taken into account, when in fact they are an essential part in wage and price-setting throughout the economy. Also, another challenge inflation targeting faces is perhaps trying to find a more effective method of calculating the target itself. Of the various methods of attaining this stability, inflation targeting is favoured by many large industrialised nations (Nessen & Vestin, 2000), and has been in the majority of cases, ultimately successful in achieving a slow, controlled, stable inflation rate.
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