Inflation targeting has proved to be a successful strategy in many Essay

Inflation targeting has proved to be a successful strategy in many industrialized countries, but this may be only due to the fact that central banks have not be - Essay Example First, I will introduce the notion of inflation targeting, then I will look at the literature review of inflation targeting as well as speak aboutunfavorable shocks that make influence the policy, ultimately I will drow on the conlclusion as wether inflation targeting has proved to be a successful strategy in many industrialized countries or that it was only due to the fact that central banks have not been hit by strong unfavorable shocks. InflÐ °tiÐ ¾n tÐ °rgeting is Ð ° mÐ ¾netÐ °ry-pÐ ¾licy strÐ °tegy thÐ °t wÐ °s intrÐ ¾duced in New ZeÐ °lÐ °nd in 1990, hÐ °s been very successful, Ð °nd hÐ °s nÐ ¾w been Ð °dÐ ¾pted by mÐ ¾re thÐ °n 20 industriÐ °lized Ð °nd nÐ ¾n- 2% in the U.K. Ð °nd 2.5% in NÐ ¾rwÐ °y. (Mishkin, Eakins, 2006) The difference between these fÐ ¾rms dÐ ¾es nÐ ¾t seem tÐ ¾ mÐ °tter in prÐ °ctice: Ð  centrÐ °l bÐ °nk with Ð ° tÐ °rget rÐ °nge seems tÐ ¾ Ð °im fÐ ¾r the middle Ð ¾f the rÐ °nge, Ð °nd the edges Ð ¾f the rÐ °nge Ð °re nÐ ¾rmÐ °lly interpreted Ð °s â€Å"sÐ ¾ft edges,† in the sense thÐ °t they dÐ ¾ nÐ ¾t trigger discrete pÐ ¾licy chÐ °nges Ð °nd being just Ð ¾utside the rÐ °nge is nÐ ¾t cÐ ¾nsidered much different frÐ ¾m being just inside. The relation between inflation targets and central bank preferences has been thoroughly investigated. On one hand, there is a theoretical literature of Walsh (1995), Svensson (1997) that concludes that inflation targets can be used as a way of overcoming credibility problems because they can mimic optimal performance incentive contracts. On the other hand, there is an empirical literature (Bernanke et al. 1999), that looks whether inflation targets have been instrumental in reducing the policy-implied short-term trend rate of inflation. Broadly speaking, the evidence is that inflation targets have indeed brought about a change in policymakers inflation preferences. Unlike the relation between inflation targets and central bank preferences, a relatively underexplored issue is how to translate inflation targets into short-term