Macroeconomics Case Study

Inflation Targeting as a Monetary Policy Tool: The Case of Bank of England

OR

Abstract: Since Adam Smith’s time, stable price level has been a gospel. The assumption – that economic growth, when achieved at a healthy inflation level, will keep defuse economic turbulences – makes economists and policymakers formulate the right dosage of inflation. Many policies and mechanisms, to hit that right balance, have been professed and implemented in various economies. Their efficiency has been put to litmus test every time the respective economies felt a ripple, notwithstanding the intensity. The latest addition to these mechanisms is inflation targeting. Though New Zealand has been the harbinger of inflation targeting, its success in the UK for a decade and half has won it large fanfare. UK adopted inflation targeting, more out of compulsion than conviction in 1992, when it needed an anchor to induce monetary discipline and guide all other variables. From then on, the new mechanism has been delivering goods till 2007, when for the first time it strayed from its target. Critics have not refrained from casting shadows over the efficacy of inflation targeting and are preaching new mechanisms. This case study helps discuss the effectiveness of inflation targeting as a monetary policy tool in a globalised environment and also to debate over the central bank’s role in striking a balance between growth and inflation.

Pedagogical Objectives:

• To discuss the reasons for inflation and its effect on the economy
• To analyse the various tools to ensure price stability
• To discuss whether the above tools were successful in bringing about price stability
• To analyse the reasons for adopting inflation targeting as a monetary policy tool.

Keywords : Infosys; Global delivery model; IT (information technology) consulting services; NR Narayana Murthy; Nandan Nilekani; Moving up the value chain; Infosys' enhanced service delivery model