Question

7. How does inflation targeting help reduce the time inconsistency problem of discretionary policy?

Short answer

Inflation targeting help reduce the time inconsistency problem of discretionary policy as,

• Improves the responsibility
• Prove whether policymakers are loyal

Step-by-step solution

Concept introduction

Inflation is the rate of growth in prices over a provided period. Inflation is generally a wide action, such as the general boost in prices or the gain in the cost of living in a nation.

Explanation

Inflation targeting improves the responsibility of financial policymakers and is an instrument of self-discipline that actually connects the hands of policymakers to devote to a policy approach. Because of the clarity of an inflation-targeting framework, it is absolutely effortless to prove whether policymakers are loyal to a committed policy approach. As an outcome, there is considerably smaller capacity and incentive for policymakers to turn to a discretionary approach which could improve outcome or raise the inflation pace, therefore mitigating the time-inconsistency issue.

Inflation-targeting central banks employ in expansive public information movements that contain the allocation of glossy brochures, the publication of Inflation Report-type records, making addresses to the public, and continual transmission with the selected government.

Final answer

Inflation targeting help reduce the time inconsistency problem of discretionary policy as,

• Improves the responsibility
• Prove whether policymakers are loyal