Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 25: Q.19 (page 676)

What are the purposes of inflation targeting, and how does this monetary policy strategy achieve them?

Short Answer

Expert verified

The goal of inflation targeting is to keep inflation under control while also increasing the credibility of monetary officials' commitment to price stability. These objectives are met by announcing a numerical inflation target and a commitment to price stability

Step by step solution

01

Content Introduction

Inflation targeting is a monetary policy framework in which the central bank employs monetary policy tools, particularly the management of short-term interest rates, to keep inflation in check.

02

Content Explanation

To keep inflation under control while increasing the credibility of monetary officials' commitment to price stability is the purpose of inflation targeting. These objectives are met by announcing a numerical inflation target and a commitment to price stability as the primary long-term goal of monetary policy, increasing communication with the public and financial market participants about monetary policy goals and processes, and holding policymakers accountable for meeting the inflation target.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What traits characterize a “conservative” central banker?

Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country's central bank affect the speed of adjustment of the aggregate supply curve to policy announcements? How does this result affect output stability? Use an aggregate supply and demand diagram to demonstrate.

How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock? How does a credible nominal anchor help if a negative aggregate supply shock occurs? Use graphs of aggregate supply and demand to demonstrate.

Suppose two countries have identical aggregate demand curves and potential levels of output, and γis the same in both countries. Assume that in 2019 , both countries are hit with the same negative supply shock. Given the table of values below for inflation in each country, what can you say, if anything, about the credibility of each country's central bank? Explain your answer.

Go to the St. Louis Federal Reserve FRED database, and find data on the core PCE price index (PCEPILFE) and the spot price of a barrel of oil (WTISPLC). For both variables, convert the units setting to "Percent Change from Year Ago, " and download the data from 1960 to the most recent available data.

a. Identify periods in which oil price inflation is 80%or higher.

b. In the periods identified in part (a), how many months was oil price inflation 80% or higher? What was the average core inflation rate during each of those episodes?

c. Based on your answers to parts (a) and (b) above, what can you conclude about the credibility of more recent monetary policy compared to its credibility in the earlier periods?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free