Inflation Targeting and Price Leveling - Research Paper Example

In Asia, many central banks have decided on stabilizing inflation to be their basic objective, when formulating monetary policies. In this regard, inflation targeting is one of the fiscal policy frameworks that the different developing and developed countries implement purposely to achieve price stability among them. According to Ito and Hayashi, Inflation targeting is the workable structures, which the central bank in the country uses for its communication and accountability. Explicitly, the defined numerical objective that the central bank would like to achieve on a pre-empted inflation keeps the prices at a stable rate, thereby making the country not to experience skewed prices during inflation.

Ito and Hayashi indicated that some central banks have been on the forefront and have clear guidelines of adopting such policies. Others have not taken the bold step of declaring clearly that they have a guideline for adopting the policies, but simply follow what their counterparts do. In reality, the practice is gaining popularity at a faster rate due to its importance. In fact, central banks consider price stability as an important element of controlling inflation, therefore, they objectively advise the countries not to consider price stability a policy rule, but set it as the main objective.

Mishkin observed that through inflation targeting, the government is obliged to keep inflation at relatively low levels. This could be probably achieved by institutional reforms in both the financial and fiscal sector. Moreover, setting the targets above those of developed economies is another practical way of keeping the emerging markets safe from the impacts of inflation. This is practical because, during inflation, an upsurge in the commodity prices does not go beyond the value of hard currencies such as the dollar and sterling pounds.

Therefore, when the county is targeting and sets the targets above such currencies, they would not for sure experience a great impact during inflation, whether, or not anticipated.