The Effectiveness of the Inflation Targeting Policy

The Effectiveness of the Inflation Targeting Policy1
THE EFFECTIVENESS OF THE INFLATION TARGETING POLICY
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The Effectiveness of the Inflation Targeting Policy2
Contents
Introduction.................................................................................................................................................4
MAIN BODY..............................................................................................................................................5
CONCLUSION.........................................................................................................................................22
REFERENCES..............................................................................................................................................24

The Effectiveness of the Inflation Targeting Policy3
THE EFFECTIVENESS OF THE INFLATION TARGETING POLICY
Abstract
This study serves to document the effectiveness of employing inflation targeting as a
monetary policy and link it how these policies work hand in hand with economic institutions
which underwent a series of reforms to improve growth following Turkey’s financial crisis in
2001. The reversal in institutions is as a direct effect of the political turnaround. The first
political turnaround coincided with an in-depth deepening in the democratic levels in Turkey
under the tutorage and guidance of the European Union. Coupled with a series of policies to
recover the economic strength, we focus on how inflation targeting policy helped in stabilizing
the economy and how effective it is to economic growth. Faced with several challenges and
obstacles, we delve into how the adaption of inflation targeting has been effective in developing
economies, with emphasis on Turkey as our case study.

The Effectiveness of the Inflation Targeting Policy4
INTRODUCTION
According to EserTurer, Inflation targeting refers to an act by the monetary control
authority, central banks specifically, to regulate the general prices of goods and services. In an
attempt to control prices by the Central banks, policies are coined and enacted such that actual
inflation is measured against a hypothesized inflation rate using such avenues as manipulating
the interest rates (Agénor&da Silva, 2019). The hypothesized inflation, recognized as a projected
inflation rate, is spelled out, and its enactment is made known to the public. Inflation targeting
policies take effect and are distinguished because of the imminent opposite movement of the two
monetary rates; interest rates, and inflation rates. The parallel movement of the interest rates and
the Inflation rates are probable drivers of the country's growth extent. This view of inflation
targeting as control for price of goods and services is however insufficient in its definition.
Unlike what Eser suggests, inflation targeting should not only concerned with the manipulation
of the prices, rather, inflation targeting is a broad concept about the general implication of the
monetary policy on the macroeconomic front of country’s that enact the policy. Significantly,
inflation targeting with an emphasis on pricing does not affect other microeconomic objective
like reaching a stable real economy or a competitive exchange rate.
Edwin Truman proposes that inflation targeting is a strategy by the central banks to
specify an inflation rate aw a goal and to adjust the monetary policies to adjust to such
goals(Aguir, 2018, pg.93). This definition of inflation targeting focusses on the maintenance of
price stability. Economic stabilization generally left on hands of the central bank. However, this
view of inflation as a function of the central bank to control price stability disregards the
international monetary fund’s own input in monetary control especially in the emerging
economies.

The Effectiveness of the Inflation Targeting Policy5
Inflation Targeting Policy refers to a Central Bank Strategy in which a specific inflation rate is
set as a goal and the different types of adjustments are done in the monetary policy so that the
goal can be attained effectively and efficiently. Thus, In this way it can be said that the use of
this particular policy will be helpful in ensuring that the attainment of economic goals and
objectives in the future can be done. This can help in improving the economic situation within a
country and can help in targeting a higher-level of economic growth in the future. Therefore, it
becomes highly important for the Central Banks that they are able to take appropriate decisions
regarding the use of this policy which will be helpful in ensuring that the economic growth can
be enhanced in the future. Thus the economists have to contribute to the best of their abilities so
that they are able to ensure that the use of this policy can be made in a right manner. The various
types of tools which are used for the purpose of Inflation Targeting are Interest Rates, Reserve
Requirements and Open-Market Transactions. Thus, in this way it can be said that the use of ITP
can be done so that the use of these tools can be made in order to control the rate of inflation
which is prevailing in the economy. In this report, specific focus will be put on the effectiveness
of ITP. Additionally, a detailed discussion on Evaluation of the Turkish Experiment from 2002
to 2020 will be made as a part of this assignment.
MAIN BODY
Kenneth proposes that inflation targeting is described as a monetary control tool. The
central bank formulates a short-range inflation target and declares such targets of inflation to the
public to spearhead a country's economic growth and stability (Bernanke & Mishkin, 1997).
Several explanations are given for inflation targeting and its practicality. Kenneth, for example,
justifies inflation as a management framework rather than a mere rule of inflation control.
According to Kenneth, inflation targeting is a justifiable framework to objectively spearhead

The Effectiveness of the Inflation Targeting Policy6
growth through a policy rule of management in a macroeconomic environment. Kenneth fails to
recognize the importance of a wholesome view of inflation targeting as both a rule for attaining a
target inflation and a means or framework for such inflation targeting purposes.
According to Svensson, inflation targeting can be termed as flexible inflation targeting or
as simply forecast targeting. Svensson argues that inflation targeting refers to formulating a
policy rate and a policy rate path which have the advantage of making the inflation and
employment forecast appear satisfactory of looking good (Svensson, 2020). Forecasts targeting
can also mean formulating and publishing a policy target path and the forecast of both inflation
and employment, and most importantly, amplification and justifying such forecasts(Adler, Lama
and Medina, 2019).
Inflation Targeting Tools
There main tools used for inflation targeting are: interest rates, open market transactions, and
reserve requirements. The reserve requirement can be used to influence inflation targeting by
enacting a decrease in the cash on hand for the commercial banks through the central bank.
Eventually, the banks will increase the number of loans advanced to the public increasing money
supply and investment responsible for economic growth and stability(Ardakani, Kishor and
Song, 2018). On the other hand, open markets refer to the enactment of such short-term interest
rates, which are periodically changed to suit the target inflation rate at a specified interest range.
i) Interest rates- interest rates set by the central bank influences inflation. Lower interest
rates increase inflation while higher interest rates are deflationary.