Inflation targeting is a monetary policy framework in which central banks set an explicit inflation rate and announce it publicly. This has advantages and disadvantages, which will be described in the paper.
The ability to reconcile predictability and expectations is one of the key benefits of inflation targeting. This means that it is simple for a company to decide whether it would benefit from improved profitability or not.
Inflation targeting is well-known for preventing bubbles and promoting long-term growth (Connectusfundadmin Web). This is due to the policies that have been implemented. Inflation targeting is also instrumental in the moderation of inflation that in return contributes to adjustment of wages and relative prices.
It has also been useful in the prevention of economic collapse in those countries that embrace the strategy.
Disadvantages of inflation targeting
Inflation targeting can become unrealistic in nature, especially when the economy is complex and large.
Inflation targeting places the central banks of various countries in such a position that they tend to ignore more pressing micro and macro-economic challenges (Connectusfundadmin Web).
Inflation targets are limited and this implies that it may be hard for the strategy to yield returns that will be of use to any economy.
Changes in the pricing dynamics may end up making inflation targeting obsolete.
Comparison of inflation targeting in UK, Canada and New Zealand
Both the UK and Canada have experienced low inflation rates in the past one year as compared to New Zealand and this provides a reason behind their low inflation targets. Inflation targets in the three countries have been successful in the stabilization of prices but this has not been the case with wage stability (Mccallum 1-13).
Work Cited
Connectusfundadmin. “6 Advantages and Disadvantages of Inflation Targeting.” ConnectUS, 13 Jan. 2017, connectusfund.org/6-advantages-and-disadvantages-of-inflation-targeting. Accessed 31 Aug. 2017.
Mccallum, Bennett. “Inflation Targeting in Canada, New Zealand, Sweden, the United Kingdom, and in General.” 1996, doi:10.3386/w5579.
