Explicit Inflation Targeting

Many countries are adopting explicit inflation targeting as a short-term policy instrument. An explicit inflation target modifies the expectations of the people regarding future monetary policy. It also acts upon the present relative demand for the domestic currency.

It has observed that fixing an inflation target does not necessarily achieve the target to maintain the price stability of the country, although in the USA, some bills have already been introduced to use explicit inflation targeting.

Countries adopted explicit inflation targeting

An appreciable number of central banks in the world adopted explicit inflation targeting. These are the central banks in leading countries like Canada, Australia, Finland, New Zealand, Israel, Sweden, Spain, and United Kingdom. The the Bank of Japan and Japanese government are also considering to opt for explicit inflation targeting as a mode to facilitate Japan’s economic recovery. Although the impact of explicit inflation targeting strategy has not yet been cleared.

Advantages of using explicit inflation targeting strategy

The explicit inflation targeting allows greater transparency regarding monetary policy goals and eventually reduce the pressure of the central banks to carry out goals other than price stability. The other advantage of adopting explicit inflation targeting is that it would increase the accountability of the monetary authority and facilitates in reducing uncertainties in the economy about monetary policy.

An explicit inflation targeting is beneficial in fixing inflation expectations. An explicit inflation target also helps the Central bank in maintaining deliberations.

Impact of explicit inflation targeting

The exchange rate has the direct and indirect impact over the prices of a country and an alteration in the exchange rate can change the demand for locally produced goods and services. This consequently changes the domestic inflation pressures.