Inflation targeting: design, performance, challenges

Abstract

Inflation rates fell markedly around the world during the last decade of twentieth century. This was the result of a profound change in the conduct of monetary policy, clearly driven by the strong, anti-inflationary stance adopted by central banks in industrial and developing countries. The central banks' new attitude toward inflation was largely the result of their newly acquired ability to conduct monetary policy independently, transparently, and credibly. One monetary policy approach that combines these virtues with a pragmatic use of policy instruments is inflation targeting. Following the pioneering example of New Zealand and Chile, countries as diverse as Brazil, England, and Sweden have formally adopted inflation targeting as the defining feature of their monetary policies. The essays in this volume study inflation targeting as a new guiding framework for monetary policy. They help to define inflation targeting as it is actually implemented, evaluate its effectiveness compared to other monetary approaches both empirically and theoretically, and offer the best designs for putting it into practice. Along with original theoretical and cross-country work, this volume includes case studies on four inflation-targeting countries, namely, Chile, New Zealand, Australia, and Brazil.

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