Inflation Targeting and Monetary Approaches: Achieving Price Stability

Inflation targeting is one of the principal monetary policies governments adopt in an attempt to stabilize the inflation rate. As a pragmatic policy, inflation targeting must encompass essential elements such as transparency, with price stability as the primary goal, accountability mechanisms, and a monetary policy based on inflation forecasts and comprehensive information sets. This article will present studies on financial institutions that have implemented inflation targeting and those that have not.

How Does Inflation Targeting Work?

Woodford demonstrated that the goals of inflation targeting can be described by a quadratic loss function, which involves the sum of squared inflation deviations from the target and the weight multiplied by the square of the output gap. This indicates that the weights provide stability to inflation and output and are likely to depend on the central bank's credibility. When establishing credibility, the weight placed on achieving inflation stability becomes greater.

Central Banks' Monetary Approaches to Inflation

Studies on Inflation Targeting Results