Inflation Targeting

By: EconomyWatch   Date: 14 October 2010

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Inflating targeting is an economic policy adopted by central bank of any nation. The central bank approximates and make public a policy target agreement by setting out specific inflation target.

Inflation targeting is the statutory responsibility of the Central bank to devise and enforce monetary policy for achieving and maintaining economic stability in the general level of prices.

After setting the inflation target, Central bank attempts to maneuver actual inflation in the direction of the target through various monetary tools. One of the mostly used strategies to achieve the target inflation rate, is through the use of interest rate changes. The interest rates and inflation rate tends to be inversely proportional and accordingly the Central bank changes interest rates to reach the target inflation rate.

The basic principles normally adopted to reach the target inflation rate are as follows:

  • In the event if inflation seems to exist above the target, the bank normally raise the interest rates to bring down the inflation.
     
  • In the event if inflation seems to exist below the target, the bank usually lower the interest to raise the inflation. Before investment, the investors analyze the considerations made by the Central bank while setting out target inflation.

Generally, no explicit ranges of inflation targets are maintained. Different countries enforce different target settings. Most of the central banks of different countries of the world try to sustain an inflation rate of 2 to 3 percent. Inflation targeting has emerged as the most significant element in monetary policy design.

Inflation Targeting

Inflation Targeting Strategy

Direct Inflation Targeting

Flexible Inflation Targeting

Explicit Inflation Targeting

Benefits of Inflation Targeting

Inflation Targeting in the World

Inflation Targeting and Monetary Policy


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