Inflation Targeting

The motivation of this essay is to provide a synopsis of inflation targeting as a monetary economic mechanism; and to illustrate the advantages and disadvantages of IT as a mechanism of monetary economics. Inflation targeting entails a decision be made on what price stability means in practice (Mishkin, 2001). Monetary policy uses all obtainable information to determine the best settings for the mechanism of monetary policy. IT generally allows for the following features; for the announcement of quantitative targets to the public, that price stability is the main goal of monetary policy, that the policy is based on available information to establish the best settings suited for inflation targeting, transparency and accountability. This points out that inflation targeting entails more than just a public announcement of numerical targets for inflation for the year ahead. This is principally significant in developing countries as many of these countries characteristically reported numerical inflation targets or objectives as part of the government's economic plan for the future year and yet their monetary policy strategy should not be characterized as inflation targeting, which requires the other four elements to be present.

The government has taken several steps to reduce the impact of higher food prices. Social expenditure for the underprivileged is one of the fastest growing categories of public spending. The conditions behind increasing prices over the past are astonishing and mainly external, and necessary steps have been taken to ensure that inflation will subside over the period ahead.

For IT targeting to have any degree of success, organizations within the country must support independence of the central bank, and a sturdy fiscal position as well as a good financial system. Chile approved new central bank legislation in 1989, which granted its central bank independence and authorization on price stability as one of its principal objectives (Mishkin,...