Inflation on Monetary PolicyIn recent years, monetary policy has been promoted to the centre stage of economic policy making the world over. This is a contrast to the first half of the 20th century when it was relegated solely to experimentation in the shadows. During these early years, fiscal policy was solely used; due in part to the depression of the thirties, and the remainder, to the process of post WWII reconstruction and the Keynesian doctrine that fiscal action was necessary to prevent deficiency in aggregate demand. By the late sixties and early seventies however, most of the developed world was witnessing the emergence of a combination of high inflation and low growth; i.e., stagnation, and the revered Keynesian analysis was unable to devise plausible responses to the phenomenon. Consequently, monetary policy emerged as an eminent instrument of economic policy, particularly in the fight against inflation. Issues related to the conduct of monetary policy worked their way to the forefront of policy debates during the 1980’s as growth and price stability were the intermediate and long term objectives. Gradually, a loose consensus emerged among industrially advanced countries that the dominant objective of monetary policy should be price stability, and from the outset of the 1990’s, this belief has increased in popularity. However, differences continue to exist among central banks with regard to the appropriate intermediate target. While some consider monetary aggregates and, therefore, monetary targeting as operationally meaningful, others focus exclusively on interest rates-even though the inter-relationship between the two targets is well recognised. Again, as with all inflation-related issues, there seems to be little consensus.Though it will only be noted in passing here, monetary policy has also gone through a renaissance in developing economies. Much of the early literature on development economics focused...
