Describe and discuss Chairman Bernanke's views on inflation targeting and transparency in central banking.

Expert Solution

As per Bernanke, the inflation targeting can be divided into two components. 1. Framework for making policy choices 2. Strategy to communicate these policies to the public.

He considers inflation targeting as the constrained discretion wherein there is a balance between the flexibility of strict rules and the lack of discipline at policymakers' level. He says that the central bank is free to do its best so as to mobilize the output and the employment in the economy in short run. It can make strong commitments to the public by keeping the inflation low in the economy and as the future prices are dependent on the expectations of future prices plus the monetary policy of changing the money supply works with a lag so the central bank must be in a position to anticipate the future.

By the communication, he says that the central bank must be transperant enough with the public out there. It show announce its targets, dicuss various policy framewrok with the public and must also release the forecasts and the future evaluation of the cpuntry. By communicating transparently with the private sector, it can reduce the uncertainties and thus stabilize the expectations of the private sector.

Together they promote the price stability by stabilizing the expectations and thus help in further stabilizing the output and the employment in the economy.

Rahul Sunny answered 2 years ago

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