Inflation Targeting as a Framework for Monetary Policy

Abstract

The two major prerequisites for adopting inflation targeting are a degree of independence of monetary policy and absence of commitment to a particular level for the exchange rate. A country satisfying these requirements could choose to conduct its monetary policy in a framework of inflation targeting. Seven industrial economies have used such a framework and have so far met with apparent success. These countries have adopted inflation targeting from a starting point of low (less than 10 percent) inflation, considerable exchange rate flexibility, and substantial independence of the central bank -- conditions rarely found in developing countries. In many of the latter, the requirements for an effective inflation-targeting strategy are absent, either because seigniorage is an important source of financing or because there is no consensus on making low inflation the overriding goal of monetary policy.