Theoretical foundations and conditions, adoption, Inflation targets
The regime of inflation targeting has emerged as a new attempt to discipline the management of money, explicit inflation targets will function as nominal anchor for the formation of inflation expectations and the fixing of prices and wages. This can effectively replace schemes based on targets for the exchange rate or monetary aggregates. The fixed exchange rate was found to be unenforceable in the face of financial innovation, making the economy susceptible to speculative attacks and creating difficulties for countries to adjust to external front, relieving teaches them the possibility of monetary policy. Setting targets for monetary aggregates was compromised, since the development of financial markets and developments in payment systems hampered the exact measurement of monetary aggregates, and also by the instability of money demand.
The theoretical basis for this scheme is based on the school New-Classical economic thought and tripod: natural rate of unemployment, expectational Phillips curve and inflation bias. Contemporary mainstream literature postulates that an active monetary policy to stimulate production and employment and a sustainable level would lead to more inflation, but not the upper and persistent levels of product or employment.
[...] Credit is affected by the increase in nominal interest rates, since by raising the interest rate and decrease the volume of reserves of the economy, the Central Bank makes commercial banks reduce their loans, thereby inhibiting investment and consumption and negatively affecting aggregate demand and ultimately inflation. Asset prices also suffer reductions, negatively influencing the wealth of individuals, discouraging investment and consumption and inhibiting corporate profits, resulting in a reduction in inflation. In practical implementation of the scheme, another important aspect to be defined, namely, what type of content should be used. [...]
[...] The independence of instruments reduces the inflationary bias present in the conduct of monetary policy and prevents that may occur the inconsistency issue time. In an inflation targeting regime, there is also an implicit interaction between the objectives of monetary and fiscal policies. For example, excessive public debt may induce high inflationary expectations, which limit the ability of the central bank meet the inflation target in the short term. A possible increase in short-term interest rates increases the cost to service the debt and its own stock, which can result in a vicious circle, with real interest rates and debt higher and higher. [...]
[...] Implementing Inflation Targeting in Brazil. Central Bank of Brazil p. (Working paper). Fischer, Stanley, Central-Bank Independence Revisited, How Independent shouldnt the central bank be NBER, V.85 No May 1995. Mendonca, HF, Inflation Targeting: a preliminary analysis for the Brazilian case. Applied Economics. V No p.129- Rigolon, GIAMBIAGI, F. Central Bank Interventions in a stabilized economy: it is desirable to adopt inflation targeting in Brazil BNDES Essays, Essay April 1998. [...]
[...] A core measure of inflation generally eliminates their calculations considered more volatile items, such as food prices and public tariffs, 'energy, the first round of tax impacts, real interest rate payments, etc . The reason for the exclusion is that these items do not reflect the "real" inflation trend, but only temporary effects on the price level. Thus, the change in ask these goods does not imply the need for change in monetary policy. However, there are other reasons why some countries to adopt, at least initially, the full index, such as the need to ensure credibility and transparency of monetary policy ends up taking them to use the full CPI, because it is known to the public and to avoid suspicions that the monetary authority is applying make up the index. [...]
[...] In order to isolate the central bank's expansionary pressures and reduce the possibility of inflationary bias and even promote greater transparency with the public and commitment to price stability, it is argued about the independence of the Central Bank. According to Fischer (1995), two models are proposed for the IBC. The first can be defined as a central bank scheme independently of objectives and instruments, the second, only instruments. The latter, in more general accepted, guarantees the freedom of Central Bank instruments to achieve an inflation rate established in agreement with the government and still requires the managers penalties as loss of their jobs if inflation exceeds the optimal level stipulated. [...]
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