Inflation Targeting New Zealand
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Inflation Targeting in New Zealand had been implemented in the year 1988 to maintain price stability and also to give the Reserve Bank the ‘operational independence’ to achieve economic target of the country. In the seventies and eighties New Zealand had witnessed high rates of inflation . This called for the adoption of Inflation Targeting.
Measure of Inflation Used for Targeting
In the present scenario New Zealand has targeted inflation in the range 0-3%. The index chosen as a measure of inflation is the Consumer Price Index since it is the most comprehensive tool. Despite this index having several disadvantages it is accepted on the ground of familiarity.
Transparency:
Transparency is a key factor for the practical implementation of the monetary policies. It is also required to maintain the accountability of the Government or the Central Bank. To clarify the incentive problems and as well as to maintain the accountability structure the Governor is bound to explain the odd factors of inflation targeting, for which the inflation has moved beyond the target.
The Government can overrule the Reserve Bank’s decision regarding monetary policy and other prescribed objectives of price stability.
As a result of transparency, the relevant investors can learn to formulate policies . Market prices adapt themselves involuntarily according to the new information regarding inflation.
In New Zealand the inflation forecasts based on the upcoming monetary conditions are announced publicly which further assures transparency.
Forward Looking Policy:
The Bank or Government has to react against the usual inflation disturbances. Forward looking means the announcement of the inflation forecasts instead of waiting for the improvement of the average policy response.
Conclusion:
Inflation targeting in New Zealand is now known as an alternative monetary policy arrangement. It is also taken as one of the best ways to reduce risk. Inflation targeting offers a degree of flexibility in the market policies to respond to different kinds of shocks in a cost minimizing manner.
