Answer to Question #182741 in Economics for Chane Cilliers

Question

it seems that in spite of the adoption of inflation targeting in recent years by the G3 countries, little emphasis has been placed on price stability. Do you agree with this statement?

Answer 1

Inflation targeting is the most popular monetary regime that the central banks of most developed and developing countries have adopted over the past three decades.

Inflation targeting is a monetary policy regime in which the main task of the central bank is to maintain consistently low prices in the economy. In practice, this means that when an economy is threatened by high inflation, central banks tend to start raising interest rates. Conversely, a decrease in inflation is a signal for a softening of monetary policy, that is, a decrease in rates.

The debate over whether inflation targeting is more beneficial to the economy or rather harmful has been going on for as many years as this monetary regime has existed.

Inflation targeting fans believe that the main bonus that any economy gets from inflation targeting is price stability. Due to low inflation, businesses, investors, and the population have more confidence in macroeconomic stability, the planning horizon is increasing, lending volumes are growing, more long-term money appears in the economy, businesses and the population have more incentives to invest, and the economy begins to grow. True, all this does not happen instantly, but in the long term, as confidence in the national currency, monetary authorities, and the policies they are pursuing grows.