Monetary Policy Challenges - Inflation Targeting Strategy and the Process of Euro Adoption

Author:Adina Criste, Alina Georgeta Glod, Camelia Milea, Iulia Lupu
Position:CCFM Victor Slavescu - CCFM Victor Slavescu - CCFM Victor Slavescu - CCFM Victor Slavescu
Pages:492-496
SUMMARY

This paper is a review of some of the challenges for the monetary authorities in countries which adopted an inflation targeting strategy, and which are also intending to adopt Euro. Both the increasing mobility of capital flows and the preparations for entering ERM II are constraints for such a monetary strategy. Since September 2008, the financial crisis, having burst into the developed... (see full summary)

 
FREE EXCERPT
Monetary Policy Challenges - Inflation Targeting Strategy
and the Process of Euro Adoption
1Adina Criste, 2Alina Georgeta Glod, 3Camelia Milea, 4Iulia Lupu,
1CCFM Victor Slavescu, 2CCFM Victor Slavescu, 3CCFM Victor Slavescu, 4CCFM Victor Slavescu
Abstract. This paper is a review of some o f the challenges for the monetary authorities in countries which
adopted an inflation targeting strategy, and which are also intending to adopt Euro. Both the increasing
mobility of capit al flows and the preparations for entering ERM II are constraints for such a monetary
strategy. Since September 2008, the financial crisis, having burst into th e developed countries, has also
affected the Central and Eastern Europ e countries, and this phenomenon represents another challenge for the
monetary authorities.
Keywords: European integration, capital mobility, exchange rate flexibility, ERM II, financial crisis.
1 Introduction
The macroeconomics debate on the effectiveness or ineffectiveness of monetary policy along with
empirical evidence from many countries lead policy makers and economists to come to a general
consensus suggesting that monetary policy can exert some real effects on the economy, but only in
the short run. The same policy becomes ineffective to change the level of output in the long run and
has a negative effect on the central bank’s credibility and could lead to a loss of public confidence.
These empirical findings based on theoretical models lead many central banks to look for a credible
nominal anchor. Inflation could serve as one of these nominal anchors. The main objective of
inflation targeting is to achieve low and stable inflation in an economy. Other benefits of inflation
targeting include increased accountability of the central bank (or the monetary authority) and
transparency of their operating procedures. Hence, many emerging economies as well as some
industrialized countries have recently switched to ‘inflation targeting’ as their monetary policy
regime.
Early proposals of monetary systems targeting the price level or the inflation rate, rather than the
exchange rate, followed the general crisis of the gold standard after World War I. Interest in inflation
targeting schemes diminished during the Bretton Woods system (1944-1971), as they are normally
inconsistent with exchange rate pegs such as those prevailing during three decades after World War
II. New Zealand was the first country to adopt an inflation-targeting regime in 1990. Since then, many
countries have adopted this strategy including both industrialized countries (such as Australia,
Sweden, Switzerland, and the United Kingdom) and emerging economies (such as Brazil, Chile,
Columbia, Czech Republic, Iceland, Israel, Mexico, Peru, the Philippines, Poland, Hungary, Romania
and South Africa). Some discussion has also taken place in the Federal Reserve (the United States)
and the Bank of Japan to switch to an inflation-targeting regime. The European Central Bank (ECB)
already has a two-pillar system in place with inflation being one of the policy targets (along with
monetary targets).
Countries that have adopted the inflation targeting strategy aim at reducing inflation and inflation
expectations based on an independent national monetary policy, using a nominal anchor (low
inflation), as a rule of behavior to avoid or limit the problem of temporal inconsistencies.
492

To continue reading

REQUEST YOUR TRIAL