INTRODUCTION
Inflation targeting is a strategy of monetary policy that is used to achieve goals. This paper is going in a short way to describe monetary policy, The criteria for choosing targets, Bank of Canada experience with monetary policy, Strategies for conduct of monetary policy, exchange-rate targeting, monetary targeting, implicit nominal anchor, inflation targeting, and experiences with inflation targeting.
What is Monetary Policy?
Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives. The goals of monetary policy are "macroeconomic stability”: low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy is usually administered by a Government appointed "Central Bank", the Bank of Canada. (1) In addition, Monetary Policy involves changes in the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation.
There are two kinds of monetary polices, Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy and is used to combat unemployment in a recession by lowering interest rates and a contractionary policy decreases the total money supply and has the goal of raising interest rates to combat inflation.
Monetary policy, however, has certain weakness. Unlike fiscal policy which can be focused on particular regions or aggregate markets, monetary policy has a broad impact ...