Inflation targeting as a policy instrument

Abstract

Inflation Targeting is monetary policy framework by which the focus of the central Bank’s policy is to achieve an explicitly stated inflation target. This target may be simply a point, or a point target combined with a range. Point targets are simpler and easy to track and explain while a range gives greater flexibility and helps in absorbing shocks. The basic elements of Inflation targeting are Emphasis on long-run price stability as the principal goal of monetary policy: This does not mean that price stability is the only goal, but other objectives should be pursued only to the extent to which they are compatible with the inflation target. Explicit numerical target for inflation and a timetable for reaching that target. High degree of transparency: Detailed reports and numeric projections of macro-economic indicators to make the reasons of actions generally known to all.