How should governments and central banks use monetary policy to
create a healthy economy? Traditionally, policymakers have used
such strategies as controlling the growth of the money supply or
pegging the exchange rate to a stable currency. In recent years a
promising new approach has emerged: publicly announcing and
pursuing specific targets for the rate of inflation. This book is
the first in-depth study of inflation targeting. Combining
penetrating theoretical analysis with detailed empirical studies of
countries where inflation targeting has been adopted, the authors
show that the strategy has clear advantages over traditional
policies. They argue that the U.S. Federal Reserve and the European
Central Bank should adopt this strategy, and they make specific
proposals for doing so.
The book begins by explaining the unique features and advantages
of inflation targeting. The authors argue that the simplicity and
openness of inflation targeting make it far easier for the public
to understand the intent and effects of monetary policy. This
strategy also increases policymakers' accountability for inflation
performance and can accommodate flexible, even "discretionary,"
monetary policy actions without sacrificing central banks'
credibility. The authors examine how well variants of this approach
have worked in nine countries: Germany and Switzerland (which
employ a money-focused form of inflation targeting), New Zealand,
Canada, the United Kingdom, Sweden, Israel, Spain, and Australia.
They show that these countries have typically seen lower inflation,
lower inflation expectations, and lower nominal interest rates, and
have found that one-time shocks to the price level have less of a
"pass-through" effect on inflation. These effects, in turn, are
improving the climate for economic growth. The authors warn,
however, that the success of inflation targeting depends on
operational details, such as how the targets are defined and when
they are announced. They also show that inflation targeting is not
a panacea that can make inflation perfectly predictable or reduce
it without economic costs.
Clear, balanced, and authoritative, "Inflation Targeting" is a
groundbreaking study that will have a major impact on the debate
over the right monetary strategy for the coming decades. As a
unique comparative study of what central banks actually do in
different countries around the world, this book will also be
invaluable to anyone interested in how economic policy is made.
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