Economic Principles: Inflation Targeting Policy in Australia and Canada

Running head: ECONOMIC PRINCIPLES
Economic Principles
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1ECONOMIC PRINCIPLES
Table of Contents
a. Inflation targeting policy in Australia and Canada................................................................2
Australia.................................................................................................................................2
Canada...................................................................................................................................4
b. Impediments to the successful implementation of inflation targeting policy in Canada.......7
c. Fiscal policy in Australia and Canada during the global financial crisis of 2008/09.............8
Australia.................................................................................................................................8
Canada...................................................................................................................................9
d. Negative effect of recession on Australia and Canada.........................................................10
References................................................................................................................................12

2ECONOMIC PRINCIPLES
a. Inflation targeting policy in Australia and Canada
Australia
Since 1993, Australia adapted inflation targeting policy. Governor Fraser first
attempted to keep the inflation within the targeted limit of 2 to 3 percent (rba.gov.au., 2019).
Unlike nations such as Canada and New Zealand, Australian policy regime experienced no
sudden shift. Neither there any formal agreement between government and central banks at
the beginning. Here, RBA designs medium-term strategy to achieve targeted inflation rate
using the existing set of institution.
Contribution of inflation targeting policy to economic performance of Australia
Inflation
Figure 1: Trend inflation rate of Australia
(Source: Creel & Hubert, 2018)
Australia had a poor record of maintaining a stable price level in 1970s and 1980s.
During 1970s, price level rose significantly due to oil price shocks in global market and
resulted increase in wage. The average inflation during 1980s was 8.5 percent, which was
higher than most of the OECD nations. Government used different monetary policy tool to

3ECONOMIC PRINCIPLES
attain a stable price level. Inflation rate though started to fall after 1990; the economy was
still running with the risk of instability in the price level due to hit of further recession. It is
since the adaption of inflation targeting policy, that inflation rate in Australia averaged at 2.6
percent (McKibbin & Panton, 2018). Australia successfully maintained the inflation rate
consistent with the inflation targeting policy. Since adaption of inflation targeting policy,
variation in the trend inflation rate lowered significantly with inflation rate remaining around
2.5 percent.
Output
Figure 2: Trend in GDP growth rate in Australia
(Source: Creel & Hubert, 2015)
The economy of Australia maintained an average growth of 3.7 percent since the
adaption of inflation targeting policy. The average growth rate during 1970s and 1980s was
relatively lower at 3.25 percent. The inflation targeting policy not only contributes to achieve
a higher output but also attain stability in the trend growth rate (Debelle, 2018). The volatility
of output as indicated by standard deviation of output was relatively higher at 2.5 percent