Inflation targeting as a paradigm of conducting monetary policy is a relatively recent phenomenon. The first central banks started to have inflation targets in the early 1990s and the low level of inflation targets that were initially adopted have been maintained ever since. Yet the macroeconomic context in which monetary policy is operating has changed significantly. In particular, the global financial crisis of 2008-09 and its aftermath has led to new challenges for achieving monetary policy goals. In that context, it is interesting to explore whether an inflation target of 2%, as essentially inherited from the pre-crisis period, is still useful and appropriate.

A)Describe what the adoption of an inflation target by the Bank of England entails and evaluate the merits of this approach as opposed to targeting a monetary aggregate such as M4.

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Question One of the negative economic news is inflation especially for those who dont know how to increase their income significantly to outpace the e... View the full answer