Pros and cons of inflation targeting strategy

Author:Mihaela Sudacevschi
Position:Lecturer, Ph.D., Faculty of Economic Sciences, ?Nicolae Titulescu' University, Bucharest
228 Lex ET Scientia. Economics Series
The purpose of this paper is to define the inflation targeting strategy and its characteristics.
Inflation targeting is a monetary policy strategy in which the central bank projected estimates and
makes public, or “target” inflation rate and then, attempts to steer actual inflation towards the
target through the use of interest rate changes and other monetary tools. Early proposals of
monetary systems targeting the price level or the inflation rate, rather then exchange rate,
followed the general crisis of the gold standard after the World War I. Inflation is usually
measured as the change of prices for consumer goods, called Consumer Price Index (CPI).
Inflation targeting assumes that this figure accurately represents growth or money supply, but is
not always the case. The most serious exception occurs when factors external to the national
economy are the cause of the price increase. A more essential objection to the strategy of inflation
targeting is that it does not really comprise a specific set of monetary policy recommendation
would traditional monetarism did, but just constitutes an explicit statement of the aims of the
monetary authority.
Keywords: inflation targeting, monetary policy, central bank, monetary strategy
Monetary policy is the process by which the government, central bank, or monetary authority
of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or
rate of interest to attain a set of objectives oriented towards the growth and stability of the
economy1. Monetary policy plays a central role in each country which participates in the
international financial system and inflation targeting has become a leading concept for
management of monetary policy.
The definition of inflation targeting given by Ben Bernanke is the appropriate one.
Accordingly, inflation targeting is “a framework for monetary policy characterised by the public
announcement of official quantitative targets […] for the inflation rate over one or more time
horizons, and by explicit acknowledgement that low, stable inflation is monetary policy’s primary
long-run goal. Among other important features of inflation targeting are vigorous efforts to
communicate with the public about the plans and objectives of the monetary authorities, and, in
many cases, mechanisms that strengthen the central bank’s accountability for attaining these
objectives.” The definition can be wrapped up by adding instrument independence for the Central
Bank and the lack of an explicit intermediate target, as all factors affecting inflation are taken into
Lecturer, Ph.D., Faculty of Economic Sciences, „Nicolae Titulescu” University, Bucharest, (email:
1 Federal Reserve Board. January 3, 2006.

To continue reading

Request your trial