Most modern central banks engage in inflation targeting instead of aiming at some nominal level of GDP, some exchange rate level, or the unemployment rate. Most central banks choose a rate of between 2-3% annual inflation and periodically adjust interest rates via open market operations and
Most modern central banks engage in inflation targeting instead of aiming at some nominal level of GDP, some exchange rate level, or the unemployment rate. Most central banks choose a rate of between 2-3% annual inflation and periodically adjust interest rates via open market operations and
Chapter1: Making Economics Decisions
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Please help me with this discussion on Inflation Targeting Core or Headline?
Transcribed Image Text:**Central Bank Inflation Targeting**
Most modern central banks engage in inflation targeting instead of aiming at some nominal level of GDP, some exchange rate level, or the unemployment rate. Most central banks choose a rate of between 2-3% annual inflation and periodically adjust interest rates via open market operations and discount rate changes.
A question, however, is whether they should focus on targeting core inflation, which excludes food and energy and a few other very volatile items, or use a headline inflation rate that includes all items in a defined consumer basket of goods. The majority of central banks focus on core inflation.
1. **Discussion Point**: Can you name a few reasons why overreliance on core inflation can be misleading?
![**Headline versus Core Inflation in the Conduct of Monetary Policy**
In discussing and thinking about the conduct of monetary policy, many central bankers focus on core inflation—that is, a measure of inflation that...
*Board of Governors of the Federal Reserve System*
*Seal: Board of Governors of the Federal Reserve [Image of an eagle in a circle]*
---
**Explanation:** The text outlines the focus of central bankers on core inflation versus headline inflation in setting monetary policy. Core inflation excludes volatile items like food and energy prices, providing a more stable measure of long-term inflation trends.
The seal contains an eagle, symbolizing the Federal Reserve's authority and responsibilities.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcd08fd21-7e2f-4214-9769-d352731fcd2d%2F0578a2ba-1c8f-41b8-9a3a-dedc9c2362e7%2Ft8crobg_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Headline versus Core Inflation in the Conduct of Monetary Policy**
In discussing and thinking about the conduct of monetary policy, many central bankers focus on core inflation—that is, a measure of inflation that...
*Board of Governors of the Federal Reserve System*
*Seal: Board of Governors of the Federal Reserve [Image of an eagle in a circle]*
---
**Explanation:** The text outlines the focus of central bankers on core inflation versus headline inflation in setting monetary policy. Core inflation excludes volatile items like food and energy prices, providing a more stable measure of long-term inflation trends.
The seal contains an eagle, symbolizing the Federal Reserve's authority and responsibilities.
Expert Solution
Step 1: Define central bank
Central bank refers to the institution of a an economy that uses its monetary policy to maintain the economic stability in the economy. It also control and regulate the commercial banks and other financial istitutions in the economy.
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