Tuesday, October 11, 2011

LIMITS TO INFLATION TARGETING

 Inflation targeting may do more harm than good if there is a substantial

chance that the central bank cannot in fact control inflation. A prerequisite for

central bank control of inflation is appropriate coordination with or backup by fiscal

policy, and the nature of the required coordination will depend on whether and

how central bank independence from the fiscal authority has been implemented.

These considerations suggest that in those countries where inflation control has in

the past been most difficult, inflation targeting may be least useful. Where inflation

control has in the past been successful, the benefits of inflation targeting may have

more to do with the associated changes in the policy process and in the central

bank’s communication with the public than with the inflation target itself.