Legislation Targeting

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Introduction

In this essay, I am going to compare exchange rate targeting, monetary targeting and inflation targeting. I am going to explain when we should use the different types of policies. I will also explain the different advantages and disadvantages of each of them in order to compare them.

During the past several years, we have asked ourselves the question: "How should we conduct the monetary policy to find price stability?" The government and the economic authorities goal is to find price stability in the economy. One of the most important features to achieve the price stability is the use of a Nominal anchor. We are going to check the different monetary policy regimes to compare and observe which one is the most beneficial for …show more content…
It could also take the place of crawling target or pegging target, in the one the currency is able to depreciate so that the inflation rate in the actual pegging country can be higher than in other countries. (page 228)

Exchange rate targeting advantages:

Some of the advantages of exchange rate targeting are:

" In an exchange rate targeting, a nominal anchor could solve the inflation rate problem of the international goods that are traded. So, this means that it helps keep inflation under control. (book page 228)
" It could help hold the inflation expectations in comparison with the inflation rate in the country whose currency is being pegged, this is in case the exchange rate is credible. (book page 228)
" The exchange rate targeting uses the automatic rule in order to mitigate the time inconsistency problem. It makes the monetary policy tighten when the currency is going to depreciate, or it could loosen up if the currency is appreciating. (book page 228)
" The exchange rate targeting also helps with transparency and accountability. It makes it easy for the public to understand and believe. (book page 228)

One example of this is the use for both France and England for reducing their inflation in …show more content…
(book page 239) Disadvantages of Inflation Targeting

Some of the advantages of Inflation targeting are:
" Inflation targeting is hard to control by the authorities. This causes a problem in countries that are trying to lower their inflation in an emerging market. (Page 243) This problem means that the emerging country has a high chance to find a large inflation error in their forecast. So, the best option would be to look at lowering when the inflation has already been decreased before successfully. (book page 243)
" A second problem with Inflation targeting is that, due to the long lags that the monetary policy experiences, the inflation targeting doesn't tell us any quick signals about the posture of the monetary policy to the market or to the public. (book page 243)
" One of the most important problems about inflation targeting is that it causes the growth to not be stable in the output and employment. This means that if a country experiences a low inflation level, the level of employment and the level of output will get back to the old high inflation rate that we previously

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