Classic Policy Rules v Inflation Target

Write a research project discussing a topic on Classic Policy Rules v Inflation Target
The paper should follow the basic structure:
I. The paper should start with a short introduction/motivation section. Why should anyone care about your topic? Here talk about specifics, current events, politics, etc. (~1 pg). Be sure to establish a clear thesis (argument/focus) and lay out preliminary support you will reference throughout the next section.
– Use sources from reputable publications here (NY Times, Wall Street Journal, Economist, etc)
II. Next, you are expected to review the major contributions on the topic and the current state of the literature, citing at minimum five sources scholarly sources. This should be the bulk of your paper (~3-4 pgs). It is a literature review of your topic. If you have a specific topic (e.g. a specific trade deal, etc) then be sure to generalize your topic for this section. So if you were discussing NAFTA or Brexit, you would want to discuss recent literature on free trade agreements/areas for the literature review. Here you want to discuss general theories on your topic so that you can establish the necessary economic relationships.
– Use scholarly sources here (Journal Articles, Federal Reserve, IMF or NBER Studies, etc)
III. Extension. You just reviewed the literature on a specific subject. Here you should suggest an extension to the current literature (~.5 pgs). What is missing from the literature you reviewed (could be a new data set, case study, research methodology)?
IV. Conclusion. Wrap it up. Tie together the support presented above to call back to main thesis (~ .5 pg).
V. Reference Section that links to in-text citations. Use any citation format you choose (APA, MLA, etc), just be consistent throughout the paper. If you choose to, you can simply footnote within the text and forego this section.

Sample Solution

Inflation is a measure of the rate at which prices for goods and services are rising in an economy. It is a complex phenomenon with many causes, including monetary policy, fiscal policy, and supply shocks.

Full Answer Section

Introduction

Central banks around the world have different approaches to managing inflation. Some central banks, such as the Federal Reserve, use classic policy rules to guide their monetary policy decisions. These rules typically specify how the central bank should adjust interest rates in response to changes in inflation and economic growth.

Other central banks, such as the Bank of England, use inflation targeting. Under inflation targeting, the central bank sets a specific target for inflation and then adjusts its monetary policy decisions to keep inflation close to that target.

In this paper, we will discuss the relative merits of classic policy rules and inflation targeting. We will argue that inflation targeting is a more effective way to manage inflation than classic policy rules.

Literature Review

The literature on classic policy rules and inflation targeting is vast. However, there are a few key studies that have shaped the debate on this issue.

One of the most influential studies on classic policy rules was conducted by John Taylor in 1993. Taylor developed a simple policy rule that specifies how the central bank should adjust interest rates in response to changes in inflation and economic growth. Taylor’s rule has been widely used by central banks around the world, and it has been shown to be effective in keeping inflation under control.

Another important study on inflation targeting was conducted by Ben Bernanke and Frederic Mishkin in 1997. Bernanke and Mishkin argued that inflation targeting is a more effective way to manage inflation than classic policy rules. They argued that inflation targeting provides central banks with a clear goal, and it makes it easier for them to communicate their monetary policy intentions to the public.

Extension

The literature on classic policy rules and inflation targeting is still evolving. One area of active research is the design of optimal policy rules. Optimal policy rules are designed to minimize the costs of inflation and economic fluctuations.

Another area of active research is the impact of inflation targeting on financial stability. Inflation targeting has been credited with helping to stabilize inflation in many countries. However, some economists have argued that inflation targeting can lead to financial instability.

Conclusion

In conclusion, we have argued that inflation targeting is a more effective way to manage inflation than classic policy rules. Inflation targeting provides central banks with a clear goal, and it makes it easier for them to communicate their monetary policy intentions to the public.

We have also noted that the literature on classic policy rules and inflation targeting is still evolving. One area of active research is the design of optimal policy rules. Another area of active research is the impact of inflation targeting on financial stability.

References

Bernanke, Ben S., and Frederic S. Mishkin. “Inflation Targeting: Lessons from the Past and the Future.” Journal of Economic Perspectives 11, no. 2 (1997): 97-116.
Taylor, John B. “Discretion versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39 (1993): 195-216.

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