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Unformatted text preview: etary policy. Thus monetary policy maker is constrained from falling into time inconsistency trap. ► Disadvantages of Monetary Targeting: The relationship between the goal variable (inflation or nominal income) and the target variable (monetary aggregate) is weak. Therefore hitting the target will not guarantee that you will reach your goal. Thus monetary aggregate will no longer provide an adequate signal about the stance of monetary policy. In this case MT will not fix inflationary expectations and will not be a good guide in assessing CB accountability.3
1 Inflation Targeting Inflation targeting (IT) involves several elements:
1. Public announcement of mediumterm numerical targets for inflation.
2. An institutional commitment to price stability as the primary longrun goal, and a commitment to the inflation target.
3. An informationinclusive approach in which many variables besides the monetary aggregates are used in decision making.
4. Increased transparency of monetary polic...
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