Inflation targeting : a cost/benefit analysis of the monetary policy framework
Barsema, Jason M.
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Inflation has been defined by many great economists such as Milton Friedman as a “monetary phenomenon.” Inflation can cause many adverse effects on the global economy, and history has shown central bankers that through the control of inflation, output will steadily increase over time without the risk of overheating. Inflation targeting is a relatively new, yet controversial subject between central bankers, but over the past twenty years, the framework has proven to be successful in countries like the United States, United Kingdom, New Zealand, and Canada. This paper seeks to identify the roots of inflation through an analysis of history, and the effects that inflation targeting has had on the United States and the rest of the world. As the global economy becomes larger and more connected, there is a need for monetary policy to grow equally reliable and transparent. Throughout my research process, I have read multiple books and working papers on the subject, as well as interviewed economists on the costs and benefits of inflation targeting as a framework. I have found that inflation targeting, coupled with other monetary tools provides an efficient method of conducting monetary policy, in which the evidence in this paper supports on both an international and domestic viewpoint. In short, inflation targeting creates accountability, transparency, and quicker response times to unforeseen events, which all lead to a more efficient means of longterm, steady growth.