INFLATION TARGETING AS A STRATEGY FOR THE CONDUCT OF MONETARY POLICY Research Paper

INFLATION TARGETING AS A STRATEGY FOR THE CONDUCT OF MONETARY POLICY (IN CANADA) - Research Paper Example Monetary policy is one of public intervention measure around at influencing the level and pattern of economic activity so as to achieve certain desired goals. The task of keeping the rate of inflation low is given to authority bodies such as the central bank. Monetary policy covers all the action of the bank of Canada and the government which influence the quantity, the cost and availability of money credit in the economy through open market operations and setting of banking reserve requirements. 2. DIFFERENT STRATEGIES TO CONDUCT MONETARY POLICY I. Attainment of full employment Full employment simply refers to involuntary unemployment. Monetary policy can raise the level of employment by encouraging credit availability to labor intensive section like rural agriculture and other small scale factories. Policies that lower the interest rates constitute expansionary monetary and is likely to lead to an increase in investment hence more employment opportunities. II. Price stability Econo mics sometime suffer from inflation and deflation; both have their effects either positively or negatively. Monetary policy helps in controlling inflation pressure. Price stability can be maintained by regulating money through tools of credit control like discount rate and minimum reserve requirement ratio. It helps in maintaining equilibrium in income and wealth inequalities. III. Economic growth expansion Money policies are put in place to ensure that more money is injected in circulation to finance developments of projects, which may in turn cause a price increase. Monetary also controls real interest rates and its effect are clearly reflected in investment. If the central government goes for an affordable and available credit policy by cutting down on the interest rates, the investment level of the economy is encouraged (Ben and Woodford 94). Increase in investment simply means higher economic developments. IV. Balance of payments equilibrium The balance of payments has two aspe cts, that of surplus and that of deficit. The latter reflects stringency of money and the former an excess of money. If the monetary policy succeeds in maintaining monetary equilibrium than the balance of payments, equilibrium can be achieved. V. Exchange rate stability This refers to the value of home currency expressed in terms of any foreign currency. If the exchange rate is volatile, causing rapid changes frequently, the international society might lose confidence in the economy. The monetary policy hopes to achieve and maintain relative stability in the exchange rate. The central bank tries to influence the demand for foreign exchange and also maintaining its stability. VI. Equal income distribution Fiscal policy was s used to maintain economic equality according to some economist. In recent years, it is believed that the monetary policy can also play a role in attaining that equality. It can make unique provisions for the neglect availability like small scale factories, agricu lture and many more by providing for them cheaper credits for longer terms, thus assisting in reducing economic inequalities. Inflation is the increase in general level of prices of commodities in an economy over time. When prices rise, a buyer of goods and services is forced to pay more money for lesser goods and services. This simply means that inflation erodes the purchasing power of money. Inflation rates are used to measure the price of inflation. Economists argue that inflation is generally caused by a growth of the money