Inflation targeting

In macroeconomics, inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public. The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability, and price stability is achieved by controlling inflation. The central bank uses interest rates as its main short-term monetary instrument.[1][2][3]

An inflation-targeting central bank will raise or lower interest rates based on above-target or below-target inflation, respectively. The conventional wisdom is that raising interest rates usually cools the economy to rein in inflation; lowering interest rates usually accelerates the economy, thereby boosting inflation. The first three countries to implement fully-fledged inflation targeting were New Zealand, Canada and the United Kingdom in the early 1990s, although Germany had adopted many elements of inflation targeting earlier.[4][5]

  1. ^ Coy, Peter (7 November 2005). "What's The Fuss Over Inflation Targeting?". BusinessWeek. No. The New Fed. Archived from the original on 28 July 2011.
  2. ^ Jahan, Sarwat. "Inflation Targeting: Holding the Line". International Monetary Funds, Finance & Development. Retrieved 28 December 2014.
  3. ^ Fisher, Irving (1922). "Dollar Stabilization" . In Chisholm, Hugh (ed.). Encyclopædia Britannica (12th ed.). London & New York: The Encyclopædia Britannica Company.
  4. ^ Cite error: The named reference NBER01 was invoked but never defined (see the help page).
  5. ^ Cite error: The named reference bankofengland.co.uk was invoked but never defined (see the help page).