Inflation Targeting Policy: A Comparative Analysis

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
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PRINCIPLES OF ECONOMICS1
Table of Contents
Introduction................................................................................................................................2
Inflation targeting in Brazil and Poland.....................................................................................4
Inflation targeting: Not the perfect policy..................................................................................5
Role of exchange rate in an inflation targeting economy..........................................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

PRINCIPLES OF ECONOMICS2
Introduction
Central Banks use different kinds of monetary policy to perform its responsibility of
keeping prices stable. One of the policy that Central Banks use is inflation targeting to
stabilize the price and to support long run growth of an economy. This report evaluates the
inflation targeting policy in light of different countries that adopts the policy to grow the
economy. Inflation targeting in Australia and New Zealand
Inflation targeting was adopted by Australia in 1993. Before adopting this policy, the
Reserve Bank of Australia used to take care of its responsibility by taking policies that
pertain to fixed rate policies. Australia did use many monetary policies to keep the economy
stable, but those could not impact the economy as it were expected to do. Thus, the country
took the measure of inflation targeting. After using the inflation targeting, for long 25 years
the result supports that the policy is efficient enough to support the economy of the country to
remain stable. The outcomes of the economy in respect to both growth and inflation have
improved than it was before the implementation of inflation targeting policy. Inflation
targeting allows the Central Bank of a country to alter its inflation rate as per requirement of
controlling the employment and economic growth and that too in short run and for limited
period. Thus, it provides flexibility in the monetary policy. Data show that average real Gross
Domestic Product growth 20 years before 1993 has been considerably same as compared to
the period 1993- 2017 and 2007-2017 (Governor Reserve Bank of Australia, 2018).
However, the unemployment rate and inflation rate has decreased during post 1993 period.
Along with that, the standard deviation of the annual average rates of real GDP growth,
unemployment rate and inflation rate has decreased and that explains the improvement in the
economic stability. The stability that Australia achieved in the economy occurred during the
period inflation targeting monetary policy has been in existence. Thus, it can be said that
inflation targeting policy proved to be fruitful in Australia.

PRINCIPLES OF ECONOMICS3
The first country to adopt the inflation targeting policy was New Zealand. During
1960s and 1970s, New Zealand had been suffering from high inflation rate, low economic
growth and poor standard of living. The country implemented several monetary policy to
encounter the economic issues and failed gain any price stability. With Reserve Bank of New
Zealand Act of 1989, the country adopted inflation targeting policy to achieve price stability.
The flexibility that the policy provided helped the country to control the unemployment and
inflation rate of the country to keep the economic growth stable and less deviating. With the
Policy Targets Agreement, New Zealand changes its target inflation rate, in PTA of 1990; the
target inflation rate was in the range of 0-2%, on the other hand, in the PTA of 1999 the
target inflation rate was revised and fixed in the range of 0-3% (Victoria.ac.nz., 2018). The
inflation targeting in New Zealand is calculated as per the Consumer Price Index (CPI). The
main objective of the RBNZ is to achieve price stability, as it is one of the major factor
responsible for economic growth. Thus, the RBNZ had been increasing its flexibility of
inflation targeting policy so that it can gain more flexibility to control its inflation rate. The
use of inflation targeting policy has helped New Zealand to control the effects of other factors
such as supply shock, technological and infrastructural changes that impacts the economy of
a country. The successfulness of the inflation targeting policy can be seen from the past 37
years data of inflation rate as shown in the below given diagram.
Figure 1: Inflation
rate of New Zealand