ECON6001 Case Study: Inflation Targeting in New Zealand and Norway

This case study examines the implementation and impact of inflation targeting as a monetary policy tool in New Zealand and Norway. New Zealand faced significant inflation challenges from the 1970s to the late 1980s, leading to the adoption of inflation targeting in two phases, with mixed results in the initial period but improved outcomes later. Norway shifted from a fixed exchange rate policy to inflation targeting in 2001, setting a target of 2.5% inflation. The analysis highlights the role of central banks in managing interest rates and exchange rates to achieve price stability and promote economic growth. The study references various sources to support its findings and provides insights into the effectiveness of inflation targeting in these two countries. Desklib offers a platform for students to access this and other solved assignments.

Principles of economics
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Inflation targeting used as monetary policy in New Zealand and Norway to control the
problem inflation.
Inflation Targeting as the monetary policy tool with the involvement of central bank of country,
where the central bank set some rules and regulations regarding the inflation rate as its
objectives. It is used to create the right economic situation to create rising prices. For this the
inflation targeting use to solve it. The central government spurs economic growth by providing
liquidity, credit and jobs opportunities in the economy (Bernanke, et. al., 2018).
In case of New Zealand
New Zealand had experienced inflation from first oil shock through to last quarter 1980s.
cumulative inflation between 1974 and 1988 was 480 percent. Inflation was temporary, below
5% occurred in 1980. It leads to hold in interest rates, wage rate, prices. Although, during that
era, monetary policy confronted several and varying ordeals in order to achieve the inflation
controlling objectives that were infrequently clearly definite, and only hardly dependable along
with accomplishment of inflation reduction. As a result of this practicing, inflation anticipations
were engrained in New Zealand’s economy. Misrepresentation were persistent, there was no
compensation in output. The real growth over the same period averaged only 1.8 per cent
periodically (Choi & Cook, 2018).
The New Zealand encountered inflation targeting may be divided into two periods. The
first period, since 1987 through the end of 1991, inflation targeted for 2%. Inflation leads to
nominal interest rates and exchange rate fell, growth of output was very low and unemployment
rise. In this condition both micro-macroeconomics reforms are involved.
The second period begins from 1992, sharp rise in growth was accomplished by rise in
employment opportunities. Inflationary pressures emerged, leads to fall in inflation 0 to 2% in
1996. Monetary conditions were squeezed substantially, with 90-day rates up from 4.5 % to
9.5% in 1994. Not only this, trade exchange rate was increased in beginning of 1997. The growth
has slowed and inflationary pressures declined. But in first period the New Zealand had
encountered with full business without quickly increment in inflation prominent fiscal
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disproportions. Moreover, the accomplishment of inflation targeting had demonstrated
perplexing indeed (Wadsworth, 2017).
In case of Norway
In March 2001, the Norwegian central bank, Norges bank and Icelandic bank changed the
monetary policy regime. The Central bank switched from a fixed exchange rate policy inflation
targeting as tool of monetary policy for controlling the inflation along with the help of floating
exchange rate (Karagedikli & McDermott, 2018).
In order to ensure the price stability termed as the main objective of central banks including
Norges Bank and Seolabanki. Along with the price stability the Norway bank pursued the fixed
exchange rate as of currencies and it was treated as the intermediate target. It was later replaced
by the inflation target in 2001. The fixed exchange rate policy the exchange rate was fixed for
one or more international trading partner countries with low inflation in order to create stability
in prices. Otherwise the exchange rate fluctuations directly impact the prices due to large amount
of imports at higher prices leads to unfavorable increment in prices. This problem can be solved
only by using the fid exchange rate policy. Besides this, price development and wage
development were also the problem for Norway central bank. The central bank can only adjust
the interest rates when currency becomes weak or strengthens (Dilla, et. al., 2017). For the
inflation targeting the central bank adjusts the interest rates seeks to achieve the inflation target
which was set at 2%, often two years ahead. Monetary policy predicts the increment in inflation.
The inflation target of Norway was a year on year rate of consumer prices increases of 2.5%.
inflation deviated the from the target in short run so the monetary policy prepares according to
the future inflation rate. Effective use of monetary policy as inflation targeting with the fixed
exchange rate leads to increase 14%GDP in 2001also the government spending rises up to 40%
which is more than 50% GDP of 1970’s. employment rate also increased by 19% and accounts
32% of total employment. The ratio of Norway become highest among OECD countries. This
helps the Norway’s central bank to come over the problem of inflation targeting with the help of
fixed exchange rate and central played dominant role in adjusting the interest rates which leads
to downfall in costs of borrowing and promote the industrial development which create the new
employment opportunities in Norway and contributes increment in gross domestic product
(GDP) of Norway (Hayo & Neumeier, 2017).
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References
Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen, A. S. (2018). Inflation targeting: lessons
from the international experience. Princeton University Press.
Choi, W. G., & Cook, M. D. (2018). Policy conflicts and inflation targeting: the role of credit
markets. International Monetary Fund.
Dilla, S., Achsani, N. A., & Anggraeni, L. (2017). Do Inflation Targeting Really Reduced
Exchange Rate Pass-through?. International Journal of Economics and Financial Issues, 7(3),
444-452.
Hayo, B., & Neumeier, F. (2017). Explaining central bank trust in an inflation targeting
country: The case of the reserve bank of new zealand (No. 236). Ifo Working Paper.
Hayo, B., & Neumeier, F. (2018). Central bank Independence in New Zealand: Public
Knowledge About and Attitude Towards the Policy Target Agreement (No. 201829). Philipps-
Universität Marburg, Faculty of Business Administration and Economics, Department of
Economics (Volkswirtschaftliche Abteilung).
Karagedikli, Ö., & McDermott, C. J. (2018). Inflation expectations and low inflation in New
Zealand. New Zealand Economic Papers, 52(3), 277-288.
Wadsworth, A. (2017). An international comparison of inflation-targeting frameworks. The
Reserve Bank of New Zealand Bulletin, 80(8), 3.
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