Inflation Targeting as a Framework for Monetary Policy
Economic Issues, No. 15, International Monetary Fund, 1998
Posted: 23 Sep 2009 Last revised: 24 Sep 2009
Date Written: September 1, 1998
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.
Suggested Citation: Suggested Citation