Are you an EPFL student looking for a semester project?
Work with us on data science and visualisation projects, and deploy your project as an app on top of Graph Search.
Concept
Inflation targeting
Summary
In macroeconomics, inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public. The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability, and price stability is achieved by controlling inflation. The central bank uses interest rates as its main short-term monetary instrument.
An inflation-targeting central bank will raise or lower interest rates based on above-target or below-target inflation, respectively. The conventional wisdom is that raising interest rates usually cools the economy to rein in inflation; lowering interest rates usually accelerates the economy, thereby boosting inflation. The first three countries to implement fully-fledged inflation targeting were New Zealand, Canada and the United Kingdom in the early 1990s, although Germany had adopted many elements of inflation targeting earlier.
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. Irving Fisher proposed a "compensated dollar" system in which the gold content in paper money would vary with the price of goods in terms of gold, so that the price level in terms of paper money would stay fixed. Fisher's proposal was a first attempt to target prices while retaining the automatic functioning of the gold standard. In his Tract on Monetary Reform (1923), John Maynard Keynes advocated what we would now call an inflation targeting scheme. In the context of sudden inflations and deflations in the international economy right after World War I, Keynes recommended a policy of exchange rate flexibility, appreciating the currency as a response to international inflation and depreciating it when there are international deflationary forces, so that internal prices remained more or less stable.
Official source
About this result
This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.
Ontological neighbourhood
Related courses (5)
FIN-406: Macrofinance
This course provides students with a working knowledge of macroeconomic models that explicitly incorporate financial markets. The goal is to develop a broad and analytical framework for analyzing the
FIN-523: Global business environment
This course gives the framework and tools for understanding economic events, taking financial decisions and evaluating investment opportunities in a global economy. It builds up an integrated model of
FIN-403: Econometrics
The course covers basic econometric models and methods that are routinely applied to obtain inference results in economic and financial applications.
Related lectures (42)
Understanding the Yield Curve
Explores the yield curve's significance in predicting economic trends and recessions based on the relationship between short- and long-term Treasury bond yields.
Real Estate Bubbles: Causes and Impacts
Explores real estate bubbles, discussing factors driving property values and quiz strategies.
Linear Shell Theory: Inflation/Deflation of Spherical Shells
Explores linear shell theory applied to spherical shell inflation/deflation and membrane forces analysis.
Related publications (49)
Magnetogenesis in Higgs-Starobinsky inflation
In the framework of mixed Higgs-Starobinsky inflation, we consider the generation of Abelian gauge fields due to their nonminimal coupling to gravity (in two different formulations of gravity-metric and Palatini). We couple the gauge-field invariants F mu ...
2022Related people (10)
Related units (1)
Related concepts (19)
Quantitative easing
Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary policy that came into wide application after the financial crisis of 20072008. It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective.
Open market operation
In macroeconomics, an open market operation (OMO) is an activity by a central bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks. The central bank can either buy or sell government bonds (or other financial assets) in the open market (this is where the name was historically derived from) or, in what is now mostly the preferred solution, enter into a repo or secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral.
Market monetarism
Market monetarism is a school of macroeconomic thought that advocates that central banks target the level of nominal income instead of inflation, unemployment, or other measures of economic activity, including in times of shocks such as the bursting of the real estate bubble in 2006, and in the financial crisis that followed. In contrast to traditional monetarists, market monetarists do not believe monetary aggregates or commodity prices such as gold are the optimal guide to intervention.