Optimal inflation targeting under alternative fiscal regimes
Inflation targeting has become an increasingly popular approach to the conduct of monetary policy worldwide since the early 1990s. Most of the countries that have adopted inflation targeting judge the experiment favorably, at least thus far. In many countries, the adoption of inflation targeting has been associated with reductions in both the average level and the volatility of inflation. Inflation targeting has been especially successful in stabilizing inflation expectations. This stems from inflation-targeting central banks’ emphasis on a clear medium-term commitment for inflation (while temporary departures from the inflation target are allowed) and their increased communication with regard to the outlook for inflation over the next few years.