Since about 1990, a significant number of industrialized and middle-income countries have adopted inflation targeting as their framework for making monetary policy. As the name suggests, in an inflation-targeting regime the central bank is responsible for achieving a publicly announced objective for the inflation rate, typically at a medium-term horizon of one to three years. Under “flexible” inflation-targeting regimes, now the norm in practice, central banks are able to pursue other objectives as well, such as output stabilization, as long as the inflation objective is achieved in the long run. However, despite more than a decade of experience, important questions about inflation targeting remain unanswered. Among these are the following: To what extent does inflation targeting, as practiced, correspond to an optimal form of monetary policy? To what extent are the improvements in performance observed in countries that have adopted inflation targeting the direct result of the change in policy regime, as opposed to other causes? This book addresses these and other questions, focusing on the experience of the United States and transition economies.
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