The Rationale for Inflation Targeting

The main idea of inflation targeting is that the price stability must be the primary longterm goal of monetary policy. The rational for inflation targeting rests on three arguments. First, the inflation rate is the only macroeconomic variable that monetary policy can affect in the long run. Second, the maintenance of a low and stable inflation rate is important, and perhaps necessary, for achieving the other macroeconomic goals. Finally, this framework helps policy makers to communicate their intentions to the public and to impose some degree of accountability and discipline on the Central Bank and on the government thereto. Nonetheless, inflation targeting is not a policy rule in the classical sense instead, inflation targeting is a framework for policy making within "constrained discretion" can be exercised. Inflation targeting acts as nominal anchor and keep the economy in the desired level in the long run, while permitting it to respond in the short run to unpredictable developments.