Inflation target transparency and the macroeconomy
Over the last twenty years, many central banks have adopted increasing standards of transparency in communicating their monetary policy objectives, in particular regarding the explicit definition and quantification of their price stability objective or inflation target. One important benefit of increased transparency is that it prepares the ground for central banks to improve their credibility and facilites the anchoring of private sector inflation expectations to stated objectives (see, for instance, Leiderman and Svensson, 1995, Bernanke and others, 1999). Economic theory suggests that private decisions are partly determined by agents’ expectations concerning the future. Inflation targeting, by anchoring inflation expectations, can thus be expected to simplify private agents’ decisions, thereby reducing macroeconomic volatility and increasing overall welfare.