Sample-INFLATION AND GROWTH TARGETING

Sample-INFLATION AND GROWTH TARGETING - 1 INFLATION AND...

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Unformatted text preview: 1 INFLATION AND GROWTH TARGETING Pui Chi Ip Abstract Inflation targeting needs to be supplemented by an economic growth target so that central banks will not adopt monetary policy which results in stagnation. There is no guarantee that the economy will move towards full employment by itself when the inflation rate is kept between two to three per cent. Monetary policy does not have a comparative advantage in achieving price stability. Svensson's proposal that the Keynesian interest rate channel and the Phillips curve can be exploited by the monetary authority for the purpose of inflation targeting may not work. The R in NAIRU should stand for "range" not "rate". Email: pip@efs.mq.edu.au JEL Classification : E24, E31, E52, E60 Keywords: Inflation, Economic Growth, Monetary Policy *This is a revised version of a paper presented to the 32 nd Conference of Economists held in Canberra, ACT, in September/October 2003. Comments by participants at the Conference are gratefully acknowledged. 2 I. Introduction Inflation targeting (IT) represents the state of the art of monetary policy. Australia, among numerous other countries, has embraced this 'technology' as a means of achieving the macroeconomic goals of price stability, full employment and economic growth. In a recent address, Mr G. R. Stevens, the Deputy Governor of the Reserve Bank of Australia (RBA) reviewed Australia's experience with IT and arrived at the verdict that "Inflation targeting has been a successful model for monetary policy in Australia. It has been associated with lower, less variable inflation, and better and less variable economic growth." (Stevens, 2003, p. 26.) William Poole and William Gavin wrote recently that "The primary goal of a central bank is to develop and maintain an efficient monetary system whose primary goal is price stability, " (2003, p.5.) It has been asserted by many monetarists and like-minded economists that the monetary authorities have a comparative advantage in achieving price stability. In this paper, we question this "conventional wisdom" that the monetary authorities should take primary responsibility for achieving the goal of price stability. Since the operational instrument used by most central banks nowadays is the target cash rate and we do not live in a classical world, we cannot rely on the classical Quantity Theory of Money to provide a direct relationship between interest rate and the price level or the rate of inflation. As an alternative, the central bank seeks to exploit the indirect relationship between interest rate and inflation via the influence of the former on aggregate demand. This Keynesian channel of transmission of the effect 3 of monetary policy puts the central bank in no better position to influence economic activity than the fiscal authority. The latter is able to change directly certain components of aggregate demand like government expenditure and indirectly, private consumption and investment by altering the tax rates on personal and corporate...
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This note was uploaded on 04/28/2010 for the course ECON ECON2001 taught by Professor Tonyblake during the Spring '10 term at University of St Andrews.

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Sample-INFLATION AND GROWTH TARGETING - 1 INFLATION AND...

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