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    Inflation Targeting: Why the Value of Money Matters to You
    Inflation Targeting: Why the Value of Money Matters to You
    Inflation Targeting: Why the Value of Money Matters to You
    Ebook120 pages1 hour

    Inflation Targeting: Why the Value of Money Matters to You

    By John E. Baiden

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    About this ebook

    This book happens to be the authors treatise on inflation
    and his thesis on Inflation Targeting. The book discusses the
    remedies for inflation in general and inflation targeting in
    particular.
    LanguageEnglish
    PublisherXlibris US
    Release dateMar 2, 2012
    ISBN9781469169477
    Inflation Targeting: Why the Value of Money Matters to You

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      Book preview

      Inflation Targeting - John E. Baiden

      Copyright © 2012 by John E. Baiden.

      All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

      This book was printed in the United States of America.

      To order additional copies of this book, contact:

      Xlibris Corporation

      1-888-795-4274

      www.Xlibris.com

      [email protected]

      108745

      CONTENTS

      EXECUTIVE SUMMARY

      CHAPTER ONE

      CAUSES OF INFlaTION

      INFLATION MEASUREMENTS

      CHAPTER TWO

      CHAPTER THREE

      OTHER TECHNIQUES OF CONTROLLING INFLATION

      MODELS OF INFLATION TARGETING

      ADVANTAGES OF

      INFLATION TARGETING

      DISADVANTAGES, CONCERNS

      OR MISCONCEPTIONS OF

      INFLATION TARGETING

      CASE STUDIES

      CHAPTER FOUR

      REFERENCES

      EXECUTIVE SUMMARY

      This book happens to be the author’s treatise on inflation and his thesis on Inflation Targeting. The book discusses the remedies for inflation in general and ‘inflation targeting’ in particular.

      The book is divided into four chapters. Chapter one covers what is inflation, causes of inflation and how inflation is measured. Inflation is an increase in the average level for all goods and services, usually measured by changes in the consumer price index and the GDP deflator. There are different economic schools of thought as to the causes of inflation. The two most prevalent theories are neo-classical (Monetarist View), which postulates that inflation is caused by increases in money supply, often used to finance government spending and Neo-Keynesian view which posits that inflation is the result of diminishing returns of productivity.

      Chapter Two discusses why inflation matters. Inflation matters because it is ‘bad news’. It not only distorts prices but erodes savings, discourages investment, stimulates capital flight (into foreign assets, precious metals or unproductive real estate), inhibits growth, makes economic planning uncertain, and in its extreme form, brings about social and political unrest therefore various governments find ways and means of containing it by adopting conservative and sustainable fiscal and monetary policies. In the past, Central banks attempted to wrestle inflation by targeting monetary aggregates or exchange rates. With time, these intermediate targets were thought of as ineffective. Now, the new approach to the age-old problem of controlling inflation is known as Inflation Targeting. It was first practiced in New Zealand in 1990. Currently there are 22 countries practicing inflation targeting, otherwise called Inflation Targeting Regimes.

      Chapter three delves into what inflation targeting is, other techniques of controlling inflation, models of inflation targeting and advantages cum disadvantages of inflation targeting. Inflation targeting is a monetary policy in which a Central Bank estimates and makes public, a projected or ‘target’ inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools that can be used to affect money supply. It is ‘Responsible Central Banking’. In its best practice, it gives a central Bank independence from political interference while making the central bank responsible for effectively containing inflation. Inflation targeting framework provides a clearly defined nominal target, a coherent approach to decision making, the flexibility to respond to unanticipated shocks, and a strategy for communicating with the public and financial markets. Inflation targeting track record is rather short. There is no concrete record to situations where adhering to an inflation target will be detrimental to economic performance. Case studies done on industrialized inflation targeting regimes reveal reductions in both inflation and its expectations thereof. These countries have also experienced both an increase in output growth and a reduction in output volatility relative to the experience of non-inflation targeting countries.

      Chapter Four ends the research with my analysis and conclusion of theoretical and empirical findings of Inflation and Inflation Targeting. I was persuaded by three major case studies done mostly by eminent economists of the U.S. Federal Reserve System, including the current chairman Ben Bernanke, rendering inflation targeting as a very successful approach to Monetary Policy. Combining the overwhelming successes of inflation targeting framework by the countries within the case study with Keynesian Macro-economic theory of Consumption and Investment Function, which posits more consumption and investment spending in low inflation economies, I take the position that Inflation targeting not only enhances the effectiveness of Monetary Policy but also stabilizes rate of inflation, economic growth, and employment.

      CHAPTER ONE

      INFLATION

      Inflation is an economic condition characterized by a rise in the level of prices for all goods and services and declining purchasing power as measured against some baseline of Purchasing Power. (Case, Fair 2004)

      A careful distinction should however be made between what inflation is from a rise in price or price increase for specific good. Inflation is an increase in the average level of prices, not a change in any specific price, but an average change in price level for all goods and services, usually measured by changes in the Consumer Price Index (CP) and the GDP deflator.

      Inflation for workers is a sustained increase in the general level of prices when workers salaries or remuneration are not rising by the same rate. The effect of this is diminished purchasing power.

      Inflation has been among the more serious economic problems of the world during the past half century, with many nations experiencing far higher annual rates of inflation than those currently prevailing in the United States. (Rose, Marquis. 2006). In year 2000, the inflation rate in the Democratic Republic of Congo for example was 554%, Angola 32% and Japan -0.6% (www.imf.org).

      The effect of high inflation is diminished purchasing power, relative high cost of living, low savings and investments, which can lead to unemployment, low standard of living and social unrest. These adverse consequences of inflation have made inflation fighting a predominant focus for most governments and central banks. According to Fredric S. Mishkin (a former Governor of the Federal Reserve Bank), Price Stability is the Macroeconomic mission of the Federal Reserve Board (Mishkin, 2007).

      In New Zealand, the Governor of the Reserve Bank of New Zealand must sign a Policy Target Agreement with the Minister of Finance agreeing not to get inflation over 3% in the medium term. The governor has inflation target range of 1-3% annually. The governor could be technically prosecuted or removed from office if the inflation target is not achieved. (www.rbnz.govt.nz)

      CAUSES OF INFlaTION

      There are different economic schools of thought as to the causes of inflation. The two most prevalent theories are the neo-classical theory (Monetarist View), which postulates that inflation is caused

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