Flexible inflation targeting means that monetary policy aims at stabilizing both inflation around the inflation target and the real economy, whereas strict inflation targeting aims at stabilizing inflation only, without regard to the stability of the real economy, what Mervyn King (1997) has described as being an “inflation nutter”. By stabilizing the real economy I mean stabilizing resource utilization around a normal level, keeping in mind that monetary policy cannot affect the long-term level of resource utilization. 2 Because of the time lags between monetary-policy actions and their effect on inflation and the real economy, flexible inflation targeting is more effective if it relies on forecasts of inflation and the real economy. Therefore, flexible inflation targeting can be described as “forecast targeting”: the central bank chooses a policy-rate path so that the forecast of inflation and resource utilization “looks good.” By a forecast that looks good I mean a forecast for inflation and resource utilization that effectively stabilizes both inflation around  1  I have previously discussed these issues in Svensson (2009 b). 2  The term “inflation nutter” for a central bank that is only concerned about stabilizing inflation was introduced in a paper by Mervyn King at a conference in Gerzensee, Switzerland, in 1995 and later published as King (1997). The terms “strict” and “flexible” inflation targeting were to my knowledge first introduced in a paper of mine presented at a conference at the Bank of Portugal in 1996, later published as Svensson (1999).
Key agencies such as MGTC and Sustainable Energy Development Authority (SEDA) have been established to provide the required support and incentives to promote the industry. On the financing side, Bank Negara Malaysia has worked closely with the Ministry of Finance and the Ministry of Energy, Green Technology and Water to establish the Green Technology Financing Scheme (GTFS). The scheme is expected to benefit over 140 companies. With an initial allocation of RM1.5 billion, it was recently increased with an additional RM2.0 billion. The scheme was structured to reduce the financial risk borne by financial institutions, as the government guarantees 60% of the financing amount via Credit Guarantee Corporation Malaysia Berhad (CGC) and bears 2% of the total interest or profit rate. This financing framework aims to improve the preconditions for financial institutions to finance viable and innovative green technology companies. It provides avenues that help bridge information gaps between financiers and businesses, and introduces credit enhancements and financial incentives to address any market short comings in meeting a legitimate economic need. Efforts are also being carried out to strengthen the capacity of financial institutions to provide advisory support to businesses. The certification process that verifies the businesses which qualify for the GTFS is central to these efforts, as it not only verifies the technical capabilities of the businesses, but also assists in assessing its commercial viability. Since the introduction of the GTFS in 2010, the growth of green technology financing in Malaysia is beginning to gain traction amongst financial institutions.