1. Why do central banks conduct inflation targeting (IT) as a policy framework? Discuss some of the advantages and potential disadvantages of a central bank implementing inflation targeting. How effective has it been for countries that have adopted an IT framework? What considerations do central banks need to take account of when deciding on a numerical inflation target or objective?
2. Why are asset price bubbles so hard to deal with by monetary policymakers? Briefly explain, in the context of both credit driven bubbles, and ‘irrational exuberance' driven bubbles. If monetary policy cannot effectively address bubbles, then what other feasible option is available?
3. Explain the difference between central bank tools, goals, intermediate targets, and operating targets (or policy instruments), and why the Fed needs to employ all to conduct monetary policy. Now explain the criteria for choosing operating targets. How do your answers in the previous parts of this question help explain why the Fed sometimes is not able to obtain its goal(s)?