Monetary Policy & Issues

In the 1970's, many countries were plagued by persistently high inflation rates, which were thought to cause a significant loss in economic efficiency. Since persistent inflation is considered to be ultimately the result of monetary policy, many countries in the 1990s sought institutional reforms to their central banks to prevent a return to the 1970s experience. A popular reform was to move from giving central banks multiple policy goals to a single mandate of price stability. The single mandate was accompanied by the introduction of an inflation target, in which central banks aim to keep inflation within a pre-defined numerical range. The logic behind these reforms was a belief among proponents that it would remove the political temptation to 'pump up' the economy in the short run at the expense of long-run price stability, and a belief that 'fine tuning' monetary policy in response to every change in economic conditions, was of little value. This book develops quantitative measurements to analyse the success of inflation targeting abroad by comparing both the performance of targeters to non-targeters and the performance of countries before and after targeting was adopted.