Inflation targeting is proposed by Taylor.1 Inflation targeting is a modified version of Friedman’s2 proposal of a fixed growth rate for money supply. McCallum3 proposes a 3% growth rate for the supply of money, which is adjusted in response to changes in the growth rate of nominal gross national product (GNP). The foundation of inflation targeting is formed by the rational expectations hypothesis. The hypothesis demonstrates that indiscriminate use of monetary, fiscal policy, or both would teach economic agents to anticipate their consequences and correct their behavior accordingly; thus rendering discretionary policy ineffective over time. The ineffectiveness of monetary policy is a prominent component of the ...
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