Dilemmas over Poland's integration with the Eurozone
A Central Bank plays a crucial role in protecting market economy from inflationary pressure. Setting a low inflation rate is a tool widely used to manage monetary policy in most countries today. This paper presents both positive and negative experiences of inflation targeting in developed countries. Additionally, it shows current theoretical controversies over the role of Central Banks in stabilising open economy exposed to external demand and supply shocks. The Neokeynesian school of thought created a new macroeconomic approach to stabi- lisation policy within the frame of the AD-IA model. This model is a soft modification of the traditional, well known AS-AD model. The Neokeynesian AD-IA model of open economy emphasises the role of the Central Bank in adjusting processes of the domestic economy to external shocks. Neoclassical and neokeynesian advocates agree that inflation targeting is the best choice for the Central Bank activity. But contrary to the neoclassical advocates, the Neokeynesians underline the role of the Central Bank in the modification of external demand and supply shocks in approaching the inflation target. Such phenomena as sticky prices and wages, as well as, international economic interdependence weaken the strength of automatic stabilization forces which could keep the domestic economy in full equilibrium. The Central Bank cannot stand aside in the situation of inflationary pressure or wait for long-term self-adjustment processes. These automatic market forces work too slowly. However, contrary to the traditional Keynesian school, the Neokeynesians reject the policy of global demand manipulations to stimulate real activity. Such policy is counterproductive from the point of view of inflation control policy. They share the neoclassical school's views on the long-run neutrality of money. (original abstract)
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