Overview on Inflation Targeting as a Monetary Policy Strategy Essay

INTRODUCTION Since the 1990s, a large number of industrial countries and a growing number of emerging market and transition economies have adopted inflation targeting as their monetary policy strategy. During the implementation they face many challenges. However, there is no established pattern so countries must learn along the way from one another and more importantly from their own experience. This paper provides an overview on inflation targeting as a monetary policy strategy, necessary preconditions for its successful implementation, its advantages and disadvantages and issues and challenges that emerging market and transition economies face while defining and implementing this monetary policy strategy. Inflation targeting as a monetary policy strategy Macroeconomic policy of any country has several goals such as employment, economic stability, economic development and production growth. Those goals are achieved by appropriate fiscal and monetary policy led by â€Å"most important players in financial markets† , Central Banks. Healthy macroeconomic policy means healthy economy which can be achieved through one of three monetary strategies: monetary targeting, inflation targeting and implicit nominal anchor. Central banks are held highly accountable for the conduct of monetary policy and hitting the targets. In other words, those regimes appear to be highly transparent. Furthermore, what is common for these three strategies is that all three of them focus on price stability, which is, for most Central Banks of the world, the main goal of monetary policy. Not so long ago policy makers reintroduced the idea of targeting. They first introduced monetary targeting during the seventies and eighties, and later on in 1989 infla... ...//www2.gsb.columbia.edu/faculty/fmishkin/PDFpapers/w5893.pdf †¢ Mishkin, Frederic S. and Schmidt-Hebbel, K., 2006, â€Å" Does Inflation Targeting Make a Difference?† Central Bank of Chile Working Papers No. 404 available from http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc404.pdf †¢ Johnson, D., 2002, â€Å"The Effect of Inflation Targeting on the Behavior of Expected Inflation: Evidence from an 11 Country Panel,† Journal of Monetary Economics 49, pp.1521-1538; †¢ Gerlach, S., 1999, â€Å"Who targets inflation explicitly?† European Economic Review 43, pp.1257-1277; †¢ Lin, S. and Ye, H., 2009, â€Å"Does inflation targeting make a difference in developing countries?† Journal of Development Economies 89, pp.118-123; †¢ Cukierman, A., 1996, The Economics of Central Banking, in: H. Wolf (ed.) Contemporary Economic Issues: Macroeconomic and Finance, Basingstoke, UK: Macmillan.