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5. Monetary Targeting Rules

j. describe qualities of effective central banks;

## l. contrast the use of inflation, interest rate, and exchange rate targeting by central banks;

What is the primary goal of inflation-targeting monetary policy? Price stability

What is Central Bank Independence? Goal independence: The bank has the freedom to select the objectives of monetary policy (low inflation, target rate of unemployment, level of GDP, etc)

What are the drawbacks when a country pegs its nominal exchange rate to another low, stable-inflation country as a means of achieving domestic price stability? 1. This monetary policy deprives the central bank of its ability to respond to idiosyncratic domestic shocks. 2. Such countries can become prone to speculation against their currencies.