--%>
Assignment Help - homework help

Would inflation targeting be a good policy

Question:

Why might it be difficult for the Fed to formally adopt inflation targeting?  Would inflation targeting be a good policy for the Fed in the present economic environment?

Answer:

The most important part of the inflation targeting debate is about the optimal level of inflation. While many people believe that it should be in the range of 2%, it is difficult to ascertain the actual optimal level. Again, if the rate is fixed to 2%, then the Fed will have limited scope for a cut back in the interest rates, which might be required periodically to boost investment. Another case in point is that empirical evidence has suggested that US has experienced lowest level of unemployment when the inflation rate was in the range of 3-5%. Another problem is that the inflation targeting itself might not be efficient, asset price and hence the asset market control will also become important if the goals of inflation targeting are to be realized. In the present economic scenario, when the economy needs stimulus, and investment levels are quite low with high level of unemployment, inflation targeting does not seem to be a good policy measure. There is a need for an increase in the aggregate demand, which if materializes, will lead to an increase in inflation. And if inflation targeting is in place, the interest rates will have to be hiked, which will hamper recovery.

 

   Related Questions in Macroeconomics

  • Q : Principles of macroeconomics Explain

    Explain the concept of “economies of scale” and “increasing returns”.

    		•
  • Q : Inflation Inflation is frequently

    Inflation is frequently described as "too much money chasing too few goods." Is this a satisfactory definition?

    		•
  • Q : Problem on slope of demand curve The

    The demand curve for DVD games is a straight line, therefore its slope: (1) Is constant, although price elasticity of demand drops/falls as output increases. (2) Price elasticity are both stable. (3) Is constant, although price elasticity of demand increases as the pr

    		•
  • Q : Limitations of using GDP as an index of

    What are the limitations of using GDP as an index of welfare of a country?A) The N.I. figures provide no indication of the population, skill and resource of the country. Thus the levels of welfare stay low.B) A higher N.I. migh

    		•
  • Q : Role of price in market economies What

    What is the role of price in market economies?

    		•
  • Q : International trade the most frequently

    the most frequently asked question on foreign direct invetment

    		•
  • Q : Why government taken as capital receipt

    Why the borrowings by Government are taken as capital receipts?

    		•
  • Q : Creation of assets or reduction of

    Illustrate which budget expenses does not result in the creation of assets or reduction of liability. Give illustrations too.

    		•
  • Q : Explain the term Macroeconomics

    Macroeconomics is a study of: (1) the economy as an entire or in the aggregate. (2) worldwide economic problems of individual households. (3) interactions among firms and households in one exact market or industry. (4) the rising income inequality wit

    		•
  • Q : Speculators actions when they are right

    When speculators are right, their actions: (1) Cause already depressed prices to drop/fall further. (2) Raise the risks to another firm of doing business. (3) Prevent price refuses from their peaks. (4) Reduce both the phase of prices and their volatility across time.

    		•