Issues on Design and Implementation in Inflation Targeting

Realization of potential benefits of inflation targeting depends on how effectively its strategy is designed and implemented. In practice, inflation targeting Central Banks have tended to execute this approach in broadly similar ways. Implementing inflation targeting has two advantages: transparency and flexibility. Transparency could improve the public understanding of what monetary policy can do and can not do; decreasing the economic and financial uncertainty; and strengthening the accountability of the Central Bank to the government and the general public. On the other hand, flexibility means the Central Banks can react effectively to short-run macroeconomic developments. These two features tend to be mutually reinforcing.
Key operational issues that arise in the implementation of inflation targeting include: the choice of the numerical values for the targets; the time horizon over which the target is relevant; the condition under which the target should be modified; how to go about hitting the target; and how to handle unintentional target misses. Making decision about these issues is fully compatible with instrument independence for the Central Bank.