Answer to Question #106880 in Macroeconomics for Usman Tariq

Question

How would an inflation targeting system help deal with effects of Brexit?

Answer 1

The main effects of Brexit are:

• slowing of UK economy because of uncertainty about Brexit;
• the fall of British pound;
• increase the price of import, as a result of inflation;
• UK loses all advantages of tarif-free zone with EU, which also increased uncertainty and prices, many multinational corporation closed their headquartes in London and UK and moved to EU and the USA.

In this situation the inflation targeting system would help:

• due to the settling target inflation rate and using financial instruments for reaching it - to make the economy more predictable, almost completely eliminate uncertainty;
• through the predictable economic climate - to stop moving multinational companies from the UK.
• stable economy and settled inflation boundaries could prevent pound from drastic fall.