Question: Inflation targeting by the monetary authorities involves three steps: (a) deciding on a target inflation rate, (b) forecasting inflation, and (c) formulating and implementing a

Inflation targeting by the monetary authorities involves three steps:

(a) deciding on a target inflation rate,

(b) forecasting inflation, and

(c) formulating and implementing a policy response should the forecast inflation rate deviate from its target level.

Comment on each of these steps.

(Note: Further details relevant to part

(c) of this question are provided in Chapter 13.)

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