Question

In: Economics

Explain briefly the need for establishing credibility of a central bank. In particular, how does credibility...

  1. Explain briefly the need for establishing credibility of a central bank. In particular, how does credibility help resolve the problem of ‘time inconsistency”.                                                                                                    

  1. What institutional features are included in the Reserve Bank of New Zealand (RBNZ) Act 1989 to help maintain the credibility of monetary policy.                                                                                                                  

  1. What is the most crucial part of the ‘inflation targeting regime’ introduced by New Zealand in 1990 and copied by many countries around the world? Exactly how is this operationalized?                                                       (5 MARKS)

  1. How might the Federal Reserve’s introduction of “average inflation targeting” in 2020 help (or not) the US economy recover from the COVID-19 shock? In answering this question first explain what average inflation targeting is, how it is different from inflation targeting, and how it might affect inflation expectations. What are the problems regarding the credibility of average inflation targeting?           

Solutions

Expert Solution

ans a.A recent survey or a poll (not confirmed) shows that out of the total population of America less than half people trust the Federal reserve and think they are doing a good job, we know that criticism doesn't matter and neither this criticism is going to help the federal bank do its job but having a credible Central Bank is crucial in ensuring that the monetary policy transmission mechanism actually works.

People always criticise you no matter how good you do . For ex -From 1987 to 2006 Alan Greenspan was the chairman of the Federal reserve bank and when he left he had a huge 70% approval rating in public opinion polls. Even after that some economists and critics have argued that his loose monetary policy have led to a prolonged growth period.- or the meaning of saying this was that he was ultimately responsible for subsequent financial crisis and recession. Then the federal bank had to fail out banks at a huge cost of about 7.7 trillion dollars caused many Americans to distrust their central bank.

Acoording to economists and central bankers it is important for having a credible central banks to manage the inflationary expections.

To be credible or to prove that a central bank is credible if people will believe it will do what it says. In a world full of uncertainity it will reassure investors , businessess , govt, stakeholders to have some sense of certainty about the future .A non - credible bank cannot achieve the target before or better than a credible central bank.

Answering one question at a time is allowed , please ask questions separately.

Let me know if you need further help in this question and i will edit it ASAP , please leave a upvote. thanks :)


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