Benefits Of Inflation Targeting

The benefits of inflation targeting are many. Two of the prominent benefits of inflation targeting are enhancement of transparency and reduction of price variability.

The inflation targeting strategy promotes convergence in forecasting errors. It has observed that the countries that adopted inflation targeting, are getting greater gains then rest of the countries in the world. It has also observed that the countries adopted a numerical inflation target, succeeded in maintaining a low inflation rate. Other most important benefits of using inflation targeting include enhanced public understanding of monetary policy, increased central bank accountability, and an improved state for economic growth.

Benefits of inflation targeting

The most important benefit of inflation targeting is that it helps the central banks to maintain low inflation and low inflation eventually promotes long term growth. Some of the numerous benefits of using inflation targeting are as follows:

• Enhanced financial growth
• Reduced relative price variability
• Less arbitrary redistribution and
• Less twisting inflation taxation

Inflation targeting is an effective monetary policy, which provides better nominal anchor for monetary policy and inflation expectations.

Significant benefits of inflation targeting

Inflation targeting enable the central banks to set long run inflation objective. Some of the most significant benefits of inflation targeting are:

• Increasing accountability and monetary policy transparency.
• Taking care of time inconsistency. Time inconsistency impels the authorities in considering long term consequences of short term actions.

Empirical benefits of inflation targeting

• Inflation targeting helps in cutting down inflation and inflation expectations.
• Inflation targeting facilitates in predicting inflation.
• IT (Inflation targeting) has the ability to lower the inflation – forecast errors.
• IT has the ability to maintain price stability and prevent one-time shocks to inflation.