Dynamic concept Monetary policy

Inflation control strategies

Inflation control is one of the major mandates of central banks, but control strategies vary among different nations. The Fed in the U.S. adopts a strategy to maintain inflation at 2% annually (set-point regulation). Banks of Canada utilizes a strategy to control inflation within 1% – 3% band with center of 2% (dead-band control). The set-point regulation method requires more frequent adjustment of monetary policies to achieve inflation goal compared with dead-band control approach.

Inflation, to a certain degree, is a driving force for economic development. Albeit ultra monetary policies, U. S. inflation is very low but inflation prospect is perceived high due to concern of quantitative easing. This prompted the Fed relying on so called “communication tools” to promise low interest for extended period of time, yet the effectiveness of the promise is not convincing.

Maybe the Fed can learn something from the Bank of Canada and adopt dead-band control of inflation. It will damage the Fed reputation and credibility if it explicitly pushes inflation target higher than 2%. The Fed, however, could make a case to adopt a dead-band control approach thanks to the benefits of more stable monetary policies.

Leave a Reply

Your email address will not be published. Required fields are marked *