--%>
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 : Interest receipt Why is interest

    Why is interest received classified as revenue receipt? Answer: Interest received is a revenue receipt since it does not build any liability nor it leads to the red

    		•
  • Q : Weighed marginal cost and marginal

    Cite examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit?

    		•
  • Q : Internet technology in airline

    Speculate regarding the behavior which could result from Internet technology in airline transactions and propose 2 or more strategies to deal with them.

    		•
  • Q : Explain Tax rate increase. A change in

    A change in tax rate changes the IS equation, LM equation remaining the same. Let same, let us suppose that the government raises the tax rate from 20 percent to 25 percent<

    		•
  • Q : Money-just another good ‘What occurs in

    ‘What occurs in the money market when there is a raise in income?’

    		•
  • Q : Physical quality of life index DISCUSS

    DISCUSS the experience of high GNP countries and low GNP with regard to PQLI.

    		•
  • Q : Define Devaluation Devaluation means

    Devaluation means decrease in the external value of a country’s currency as an aware policy measure adopted by the Government of a country. In another words, we make our currency less costly in terms of foreign currency. This builds our goods ch

    		•
  • Q : Shifting of demand curve due to new

    Assume that the launch of Microsoft Xbox 360 moved the demand curve for Sony PlayStation 2 games from D0 to D1 throughout similar period if new game designers enter into this market and hence supplies of PlayStation 2 games shifted S0 to S1. The market equilibrium: (1

    		•
  • Q : Difficulty of scarcity People in whole

    People in whole the world confront the difficulty of scarcity at always because: (i) restricted resources and times preclude producing all the goods people need. (ii) greedy capitalist monopolies charge excessively high prices. (iii) international mar

    		•
  • Q : Physical quality of life index DISCUSS

    DISCUSS the experience of high GNP countries and low GNP with regard to PQLI.

    		•