inflation target

8/3/2019 Inflation Target

1/18

Should RBI resort toShould RBI resort to

Inflation targetingInflation targeting??(AGAINST THE TOPIC)

Shayak Kumar Sahu (119278007)

Ashish Mundawane (119278113)

1Shailesh J Mehta School ofManagement, II T Bombay


2/18

AGNEDAAGNEDA DEFINITION

COUNTRIES FOLLOWING THIS FORMAT

CONFLICTING FACTORS

COUNTER-ARGUMENTS

LATEST TRENDS

CONCLUSION

REFERENCES



3/18

What is inflation targeting ?What is inflation targeting ?

Developed by Federal Bank chairman Mr. Ben Bernanke andhis advisor Mishkin

An economic policy in which a central bankestimates and

projects an inflation rate and then attempts to steer actualinflation towards the target

Controls the set target using interest rate changes and othermonetary tools



4/18

Countries following ExplicitCountries following Explicit

Inflation TargetingInflation TargetingExplicit inflation targeting has been adopted by a number ofcentral banks around the world, including those in :-

Australia

Canada

Finland

Israel

New Zealand

Spain Sweden and

U.K.



5/18

Trade-off between interest

rates and the inflation rate Interest rate and inflation rate are inversely proportional

For example if inflation is above the target, bank raises interestrates to stabilize and vice-versa

Central bank raising or lowering interest rates become moretransparent under this policy



6/18

What actually happens?What actually happens?

In inflation targeting, the bank publicly estimates howhigh it expects inflation to be in the coming year.

It steers monetary policy to try to hit the target inflationrate.

If inflation is getting above the target, the bank wouldordinarily raise interest rates to cool the economy and

bring inflation back down.

If inflation gets too low, the bank would lower rates to

juice up growth, raising inflation.



7/18

Contd.Contd.

Some of the Probable advantages

> increased transparency> coherence of policy and

> flexibility of the target

Investors know what the central bank considers the targetinflation rate to be; therefore may more easily factor in likelyinterest rate changes in their investment choices

Hence it supposedly brings transparency and predictability tothe markets



8/18

FactorsFactors which conflict thewhich conflict the

Inflation targeting policyInflation targeting policy For emerging markets the real interest rate (r*) leads to conflictwith inflation targeting.

Fiscal dominance - There is often no political consensus thatlow inflation should be the overriding objective of monetarypolicy.

There is always a trade-off between reducing inflation andunemployment.

Moreover, there are short run shocks such as oil shock,structural changes which plays a part in changing theexpected inflation rate.



9/18

Counter arguments against

Inflation Targeting Inflation targeting, even without imposing a rigid rule, wouldunduly reduce the flexibility of the Central Bank to respond tonew economic developments in an uncertain world

Furthermore, it would not enhance overall accountability ortransparency given the multiple objectives of monetary policy

Prices are always flexible. Price stability cannot be quantified.Moreover, there is always a margin of error as well as upwardbias while measuring the inflation due to new products,

substitution, shift in product quality, etc.

Inflation targeting would give the Fed too little flexibility tostabilize growth in the event of an external economic shock.



10/18

Counter argument (Contd.)

There is always a trade-off between reducing the inflation rateand achieving other goals such ad maximizing GDP growth,optimal employment and financial stability

Giving more importance to curbing the inflation to moreextent, can hamper other economic factors.

An explicit target might turn central bankers into "inflationnutters", that is, central bankers who concentrate on theinflation target - to the extent of detriment of stable growth,

employment and exchange rates.

There are multiplicities of excuses for missing the targets andalways there are variations around the target point.



11/18

Counter argument (Contd.)

Outside Lag - Inflation targeting might fail to be operationalbecause of the time that it takes monetary policy actions toaffect inflation, as well as the difficulties of forecasting inflation.

Just as uncertainty about future inflation impedes goodeconomic decision making, so does uncertainty about thefuture level of output and employment.

inflation targeting highlights the inflation objective of centralbanks but tends to obscure the other goals of policy.



12/18

Some Latest Trends Over

Inflation Targeting



13/18

> The following report mentions the inflation of variouscountries where central bank has opted for Inflation

targeting.

> Out of 32 countries, 24 reported to have inflationabove target, 1 had inflation below target and 7reported inflation within the target range.



14/18



15/18

The chart below shows the change in inflation versus target forthe countries which opted for inflation targeting. Of the 32countries, 23 countries had inflation go above target, 4 countrieshad inflation falling closer to target while 5 were staying within

target.



16/18

ConclusionConclusion These reports shows that most of the countries saw inflation

increasing compared to the target.

There is little flexibility in tackling other issues like economicshock, interest rates and unemployment.

Along with that, it could have detrimental effect on stablegrowth and exchange rates.

The change in prices can change the inflation rate which istargeted.

So instead of fixing a specific value of inflation, reserve bankand government should take necessary measures to increaseor decrease inflation keeping in view the other factors



17/18

ReferencesReferences

http://wwwsiepr.stanford.edu/workp/swp00022.pdf

http://sims.princeton.edu/yftp/Targeting/TargetingFiscalPaper.pdf

http://www.investmentpostcards.com/2011/07/11/inflation-targeting-in-a-rising-inflationary-environment/



18/18

THANK YOUTHANK YOU


inflation target

Documents