Inflation targeting in monetary economics Essay Example | Topics and Well Written Essays - 750 words

Inflation targeting in monetary economics - Essay Example In the event that the inflation of a country is above the target, the bank raises its interest rates. In the long run, the action results to cooling down of the economy by bringing down the inflation rates. The remedy for inflation rates below the target involves lowering the interest rates. Consequently, there is acceleration in the economy and rise in the inflation rates after some time. Since investors in a country’s economy have a heads up to the inflation targets of the central bank, they factor in fluctuations in interest rates while making their investment decisions. Economists regard inflation targeting as one way of promoting a nation’s economic stability. The goals of inflation targeting are different across the central banks of various nations. However, an observable trend indicates that most central banks aim to stabilize prices in countries. In the United States, the Federal Reserve indicates that its main goals are to stabilize prices, have moderate and stable long-term interest rates as well as facilitate maximum employment through the policy (Bernanke 17). Other banks also list having stability in the exchange rates as among its primary objectives. New Zealand has reaped numerous benefits through inflation targeting. Once the subject of volatile inflation, it was the first country to seriously consider and implement inflation targeting as a way to achieve economic stability and growth. Currently, New Zealand boasts of low inflation rates and stable economic growth (Bernanke 33). Germany was also among others to take up inflation targeting as a productive monetary policy. However, varying dynamics of nations suggest that inflation targeting should not be taken up blindly. In the case of New Zealand, it emerges that there can be movements in policy instruments beyond the expectations of the central bank. This emerges from focusing on a narrow inflation target through strict implementation of inflation