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Inflation Targeting Strategy in China Essay

Inflation targeting strategy is defined as a systematic action plan that is adopted by the central bank of any given country to maintain an economic stability of any given country. Central bank of the given country estimates and makes public policy target agreement through fixing a given inflation target. The inflation targeting is not a method of reducing current inflation but a way of monitoring and controlling price stability after a long disinflation session. Advantages

Inflation targeting has been implemented by China and other developing countries in the recent years due to its advantages for being able to deal with some problems that are associated with an intermediate targets through focusing the most important goals of monetary policy, which are the price stabilities. On the other hand, this advantage could be offset if there is no good relationship between the inflation target and instruments used in monetary policy. The inflation targeting helps the country to maintain a low and stable rate of inflation that on the other hand lead to economic growth.

By the central bank focusing on achieving low inflation rate and increasing accountability as well as transparency of the monetary policy and the uncertainties of the future price setters would

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thus decline giving a way of accuracy. The central bank concentration on the inflation target may serve as focus for price and wage setting than exchange rate target. The other advantage of inflation target is that it provides the central bank with a clear reference concerning prices. This on the other hand determines the central bank credibility on its commitment on inflation rates to the public.

(Benigno, & Woodford, 2004) Disadvantages of inflation targeting There are several disadvantages that are associated with inflation targeting. Its not guarantee that the central bank will be successful once they use the set monetary policy. It is more difficult to implement inflation target compared to exchange rate targeting and monetary targeting. The inflation targeting requires considering long lags between the monetary policy changes and their influences in inflation. The central bank needs to have both the effective inflation fore-cast model and policy instruments.

This influences a reasonable precision of inflation forecast. The inflation targeting may lead to inefficient output stability though it provides better cyclical adjustments. It is difficult to control inflation through the inflation targeting than it is through policy instruments and monetary targeting. The inflation targeting also requires the flexibility in exchange rates which on the other hand may cause financial constrain and instability (Amato, & Gerlach, 2002) Specific feature of the inflation targeting strategy adopted by the central bank of the country of your choice

There are several components of inflation targeting. The inflation targeting is a monetary policy strategy that is quite developing. There are five main components of inflation targeting: • All the medium-term numerical inflation should be done through the public announcements • The central bank should be fully committed to the implementation of the policy whose main and primary objective is to maintain price stability. • Monetary policy and exchange rates are the tools that should be included in fixing the policy instruments.

• The monetary authority should be communicated to the public in order to maintain the transparency, objectives, decisions and the monetary policy. • While setting an inflation targeting, there should be an increased accountability. The above five components are often considered by Chinese central bank in order to attain inflation targeting objectives. The inflation target strategy setting is quite an important factor that is very considered by China as a country with an emerging market. This is because the country has set a numerical inflation targeted as a part of the government economic plan.

The central bank often opt for a long run inflation that targets above zero and the target mid point ranging from one to three percent. The main instruments of monetary policy that are actively used by this central bank There are different monetary policies that have been adopted by the central bank of China. These policies include: -The open market operation- The central bank buys and sells securities on behalf of the treasury to banking as well as non banking public. When the central bank buys the security, it reduces securities and increases when it sells securities thus affecting the money reserves.

-Central bank base interest rate- The central bank lends money to other financially able banks in very favorable interest rates which is normally known as minimum rediscount rate (MRR). This determines the interest rate which on the other hand determines the supply of the reserves and affects the employment and GDP. -central bank lending- The Central Bank sometimes provides the credit deposit facilities to the depository financial institutions which on the other hand directly affects the level of reserves.

-Credit control- The Central bank can dictated the financial institutions on the maximum interest on the amount of loan acquired, the liquid to asset ratio as well as issuing the credit guarantees to preferred loans (Bean, 1983) The three-year record of price stability (CPI-based inflation) China’s economy and its exchange are rapidly growing. The Chinese economic reform has contributed to the economic growth and has made the country one of the biggest economies in the world and is also an economic engine in the world. Though china is still facing challenges in its efforts of catching up with other big economies of the world.

The Chinese per capital income is about $1000 per annum with regulatory and legal systems in dire need of reforms. For about one decade, china have maintained fixed exchange rate for Yuan which relative to the dollar. Yuan has been exchanging at 8. 28 per dollar for three years now. When the dollar appreciates or depreciates compared to other major currencies like pound and Euro, the Yuan faces equal amount of appreciation or depreciation. The Chinese central bank intervenes in foreign exchange market to maintain fixed exchange rates.

China sells yuan in exchange of dollars when the yuan demand increases and vice versa when the yuan demand decreases. The recent intervention by the central bank has prevented yuan from appreciating. The Chinese government has been buying dollars to increase their foreign reserves which have risen from $153 billion to over $360 billion. The accumulation of dollars has increased the China’s monetary supply though china has moved to reign in monetary expansion (Carare, & Stone 2003) The corresponding period’s record of real GDP growth and exchange rate Stability Hyperinflation conquered in 1953 which brought to an end war and land reforms.

The first production census of china revealed that the GDP was underestimated in 2005. The underestimation was as a result of failing to put in to account the rapid growth of the services sector. The recorded GDP growth rate in 2007 was 11. 4%. This was in the efforts of curbing the overheating economy. The China’s growth rate reduced in 2008 due to global economic crises. The Chinese government pumped Rmb 4 trillion as an economic stimulus to invest in fixed infrastructure and human capital. It’s not clear whether the package consist the current spending plan or its new plan.

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