Inflation Targeting And Monetary Policy
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Inflation targeting and monetary policy are the actions of the central bank, currency bank or other regulatory committee for maintaining price stability of the country.
Monetary policy is adopted by the central bank or other regulatory committee to ascertain the size and rate of growth of the money supply. The rate of growth of money supply influences the interest rates.
Monetary policy and it’s types
The types of monetary policy are determined on the basis of a set of instruments and target variables that are used by the monetary authority. The monetary policy that reduces the size of money supply or increases the interest rate, is termed as contractionary monetary policy and when it increases the size of the money supply or lowers the interest rate, then it is termed as expansionary monetary policy.
Monetary policy lies on the relationship between the overall supply of money and rates of interest in an economy. A number of monetary tools are used to control the inflation, exchange rates or growth of the economy.
Inflation targeting
One of the effective instruments of monetary policy is inflation targeting. Under this monetary policy approach, the central bank sets an inflation target. The inflation target is then achieved through periodic adjustments to the central bank interest rate target. The central banks considers the Consumer Price Index while implementing inflation targeting approach.
It is the statutory responsibility of the Central bank to formulate and adopt monetary policy for maintaining price stability of the country. The inflation targeting approach of monetary policy is adopted by several countries like New Zealand, Canada, Australia, Norway, Poland, Turkey, Sweden, South Africa, and the United Kingdom.
The central bank normally follows two basic rules, while attempting to reach the target inflation rate. In the event if inflation appears to exist above the target, the bank raise the interest rate and if inflation appears to exist below the target, the bank lowers the interest rate.
