How Central Banks Set Inflation Targets

Episode 118 of Monetary Policy Explained with Fexingo dives into the history and mechanics of inflation targeting, using the Reserve Bank of New Zealand's 1989 pioneering move as the anchor. Lucas and Luna explore why central banks picked the 2 percent target, how it was exported globally via the Maastricht Treaty and the Bank of England's 1992 adoption, and whether the framework is showing its age in the post-pandemic era. They discuss the role of the Taylor Rule in formalizing targeting, the flexibility of average inflation targeting (AIT) adopted by the Federal Reserve in 2020, and the practical challenges of setting a single number for a complex economy. With insights on the European Central Bank's definition of price stability and the Bank of Japan's struggle with deflation, this episode gives listeners a concrete understanding of how the inflation target shapes everything from mortgage rates to wage negotiations. If you've ever wondered why 2 percent is the magic number, this is your explainer. #InflationTargeting #CentralBanks #MonetaryPolicy #ReserveBankOfNewZealand #FederalReserve #EuropeanCentralBank #BankOfJapan #TaylorRule #AverageInflationTargeting #MaastrichtTreaty #PriceStability #Deflation #TwoPercentTarget #Economics #FexingoBusiness #BusinessPodcast #LucasAndLuna #MonetaryPolicyExplained Keep every episode free: buymeacoffee.com/fexingo