--%>
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 : Define Depreciation Depreciation of a

    Depreciation of a currency signifies fall in value of domestic currency in terms of foreign currency. Illustration: When value of rupee in terms of US dollars falls, state from Rs. 45 to Rs. 50 per dollar, it will be a condition of depreciation of Ind

    		•
  • Q : Threats of SWOT analysis Threats of

    Threats of SWOT analysis: • Possible threat from other banks and other financial institutions • There is always a possible threat of market fluctuations. By this we me

    		•
  • Q : If the MPC is .70 and investment

    If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:

    		•
  • 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 : Physical quality of life index DISCUSS

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

    		•
  • Q : Maximizing consumer utility The

    The consumer maximizes the utility whenever spending patterns causes: (i) Total outlays to increase each time prices are altered. (ii) Marginal utilities of each and every good consumed to be equivalent. (iii) Marginal utilities from the last cent spent on each and ev

    		•
  • Q : Use the principles of supply and demand

    Use the principles of supply and demand to address a predetermined goal (set by the student) in the gasoline market. Be clear on what the current market indicates and why and what your future goal is.

    		•
  • Q : Reduction in quantity When equilibrium

    When equilibrium moves from point a to point b in the figure shown below, the only market experiencing a reduction in quantity supplied is illustrated in: (1) Panel A. (2) Panel B. (3) Panel C. (4) Panel D.

    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 : Equal Marginal advantage law Assume

    Assume that you receive $18 worth of “jollies” (that is, satisfaction, utility or pleasure) from the very first hole of golf played on a particular day, and that your extra jollies from succeeding holes drops $1 for each and every hole played. You should p

    		•