Zero-Inflation TargetInflation refers to the overall costs of goods and services as well as the cost of living within an economy/country. Different economies usually have different rates and levels of inflation and they also deal with the inflation differently (Mankiw, 2015). So far, it has been identified that the central bank of most countries is usually the body/institution charged with ensuring that appropriate levels of inflation are maintained within an economy. This is because the central bank is the main monetary authority of a country, and it as a result functions to regulate the amount of money and currency that is in circulation within a national jurisdiction (Mankiw, 2015). Additionally, they control interest rates, thus determining how citizens are encouraged or discouraged to take loans.
Inflation targeting refers to the policy and approach that is used by a central bank to openly determine inflation rate that is considered as being appropriate (Mankiw, 2015). The central bank initiates public measures aimed at achieving the desired inflation rate, which is referred to as the target (Mankiw, 2015). Many theorists have argued that over the years, inflation targeting has successfully been used to help avoid negative attributes of high inflation rates, and also to successfully manage the level of inflation of a country (Mankiw, 2015). The theorists argue that the most commonly inflation targeting approach is the regulation of interest rates through interest rate policy, and that the strategy has enabled many economies to manage the cost of living in their country through appropriately preparing for future inflation (Mankiw, 2015). A good example of where the approach has worked is the US where the Federal Reserve of the US consistently maintains target inflation range of 1.7%-2.0% (Mankiw, 2015). Whenever the inflation goes beyond this range, the Federal Reserve of the US increases the amount of money that is in circulation, while lowering interests’ rates at the same time. When the range goes beyond the targeted range, the Federal Reserve increases interest rates and reduces money supply (Mankiw, 2015). The US is currently the world’s most stable economy and this shows that the zero-inflation targeting approach is not a relevant and effective approach to managing inflation rates. It is however notable that, proponents of the zero-inflation targeting approach argue that the 2.0% approach was not effective during the last global recession and the US was adversely affected by the recession (Mankiw, 2015).
Proponents of the zero-inflation targeting have argued that inflation targeting makes it easier for countries to manage their overall economic performance. The argument is that extremities in inflation rates, high and low inflation rates, have adverse impacts on the economy, and without inflation targeting, it can be difficult to appropriately monitor and identify when the extremities occur (Tucker, 2013). Therefore, inflation targeting is important. Opponents of the inflation targeting have different perspectives and they argue that it is complex and challenging to identify true inflation. This means that the zero-inflation targeting approaches used to increase or decrease inflation rates may have unsuccessful outcomes (Mankiw, 2015). The opponents further argue that most approaches used to monitor inflation rates often overlook aspects such as quality improvement in products and services being trades hence the approaches are not warranted. Another argument is that zero-inflation targeting increases unemployment, hence it is not appropriate. This attribute is indeed accurate; hence zero-inflation targeting is not warranted.
Increased Government Spending to Fight Recessions
Governments usually regulate economic performance through a number of ways including through making changes in fiscal policies. The fiscal policies adopted by governments include changing rates of taxes charged as well as changing government spending on different sectors and industries of an economy (Mankiw, 2014). There are some macroeconomists who consider that government expenditure is one of the most effective fiscal stimuli that can be used to fight recessions (Mankiw, 2014). Some economists have argued that government spending effectively averts or reduces recession because it increases economic demand. It therefore increases economic output during recessions. This is what is considered as reducing overall recession in the long run (Mankiw, 2014). The government can aim to achieve balanced budget through its increased spending, or it may create a budget deficit. Regardless, the main issue is where the spending is directed towards, that matter.
The main theorists who are against increased government spending as a means of fighting recession argue that government spending may eventually runs into deficit and that the financing of this deficit is achieved through crowding out which entails the government borrowing from either the public or from foreign sources (Mankiw, 2014). The economist against the policy argues that the approach may indeed result in increased interest rates which stimulate further government spending (Tucker, 2013). What they argue is that in the long run this ends up reducing demand for goods and services and it ends up increasing the recession as well as its negative attributes.
Economists that concur and advocate for the policy argue that when government increases its spending on sensitive and relevant aspects and sectors such as infrastructure, repair, and construction, it gets to stimulate the economy positively and this increases the chances of the economy coming out of a recession (Mankiw, 2014). Some economists argue that government spending can increase its economic GDP (Tucker, 2013). However, it is arguable that this often results in increased taxes and for the citizens this can have adverse outcomes. It is also arguable that the policy takes resources from the private sector and redirects them to the public sector and in line with anticipatory tactics the private sector reduces its activities and supply of goods and services with the consideration that they will incur higher taxes, hence reduced profit (Tucker, 2013). This viewpoint accurately explains the notion that fighting fire with fire does not necessarily work. This is because the economic environment is in contemporary times highly volatile and this means that government spending can result in the economy having considerable debt that they are unable to pay in the long run.
- Mankiw, N. G. (2014). Brief principles of macroeconomics. Australia : South-Western.
- Mankiw, N. G. (2015). Principles of macroeconomics. Stamford, CT, USA : Cengage Learning.
- Tucker, I. B. (2013). Macroeconomics for Today. New York: Cengage.
