Managing Inflation

How should governments and central banks use monetary policy to create a healthy economy? Traditionally, policymakers have used such strategies as controlling the growth of the money supply or pegging the exchange rate to a stable currency. In recent years, a promising new approach has emerged: publicly announcing and pursuing specific targets for the rate of inflation. This book is the first in-depth study of inflation targeting. With penetrating theoretical analysis and detailed studies, the authors show that the strategy has advantages over traditional policies....

This strategy also increases policymakers' accountability for inflation performance and can accommodate flexible, even 'discretionary', monetary policy actions without sacrificing central banks' credibility. The authors examine how well variants of this approach have worked in nine countries: Germany and Switzerland, New Zealand, Canada, the UK, Sweden, Israel, Spain and Australia.

They show that these countries have seen lower inflation, lower inflation expectations, and lower nominal interest rates, and have found that one-time shocks to the price level have less of a 'pass-through' effect on inflation. These effects are improving the climate for economic growth.... They also show that inflation targeting is not a panacea that can make inflation perfectly predictable or reduce it without economic costs.


From "Inflation Targeting: Lessons from the International Experience"