F01.V.9.1 MONEY AND BANKING – Assignment 6
Briefly explain what inflation targeting is and list the five (5) main elements related to it.
Then discuss the four (4) advantages and three (3) disadvantages of this type of monetary
policy strategy.
Inflation targeting is a policy for the central bank of a country to utilize. This policy
revolves around a target that the central bank will announce publicly. It is typically
targeting a price index for consumer goods such as the consumer price index. The
country’s central banks then attempt to guide the inflation towards the publically
announced target with the use of interest rate changes and various other monetary tools.
Five main elements related to inflation targeting.
•The public announcement of medium-term numerical objectives (targets) for
inflation.
•An institutional commitment to price stability as the primary, long-run goal of
monetary policy and a commitment to achieve the inflation goal
•Information-inclusive approach in which many variables (not just monetary
aggregates) are used in making decisions about monetary policy
•Increased transparency of the monetary policy strategy through communication
with the public and the markets about the plans and objectives of monetary
policymakers.
•Increased accountability of the central bank for attaining its inflation objectives.
Four advantages to Inflation targeting:
•Inflation targeting increases the accountability of the central bank, by reducing
political pressure and time-inconsistency as it relates to economic growth and the
