Managing Inflaction - Government Should Adopt Inflation Targeting

Introduction on Managing Inflation

. The managing inflation has become one of the main objectives of government economic policy in many countries. Inflation is best defined as a sustained increase in the general price level leading to a fall in the purchasing power or value of money.(tutor2u.net) Effective policies to control inflation need to focus on the underlying causes of inflation in the economy. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. Therefore, many measures of inflation depending on the specific circumstances.(tradingeconomics.com) For example if the main cause is excess demand for goods and services, then government policy should look to reduce the level of aggregate demand. If cost-push inflation is the root cause, production costs need to be controlled for the problem to be reduced.(tutor2u.net)

Government should adopt Inflation Targeting

Inflation rates can be influenced through monetary and fiscal policies. So that government should managed inflation to prevent high and volatile rates.(ec.europa.eu) In order to managed inflation government should adopt Inflation Targeting. Inflation targeting (IT) is the new orthodoxy of mainstream macroeconomic thought. This method has now been adopted by 24 central banks, and many more, containing the developing countries, which are serious interest in following suit. Firstly adopted by New Zealand in 1990, the norms surrounding the IT management have been effective that the central banks of both the industrialized and the developing economies alike have acknowledge that managing price constancy at the lowest possible rate of inflation is their only authority. It was basically mean that price stability is a pre-condition for sustained growth and employment, and that 'high' inflation is damaging the economy in the long run.(Epstein, Yeldan 2007 pg.1)

The suitable inflation target is usually fixed as maintaining price stability, however there is limited agreement on the meaning of this term and on its fixed measurement.

The IT policy framework involves 'the public announcement of inflation targets, coupled with a credible and accountable commitment on the part of government policy authorities to the achievement of these targets' (Setterfield, 2006, p. 653).

In the words of Akyuz (2006, p. 46), 'the source of macroeconomic instability now is not instability in product markets but asset markets, and the main challenge for policy makers is not inflation, but unemployment and financial instability'. According to a recent report by the International Monetary Fund (IMF), an growing number of central banks are planning to adopt IT to their operating framework. An IMF staff survey of 88 non-industrial countries found that more than half expressed a desire