Inflation Targeting

Inflation targeting is a monetary policy strategy used by central banks to set a specific inflation target, generally jointly with governments. Under an inflation targeting regime, the targeted inflation is projected to act as a nominal peg to the extent that it could influence expectations. Unlike other policies, inflation targets are explicitly made public, which brings about direct accountability. Central banks, as implementing agencies, are entrusted with instrumental independence to achieve the target. In other words, central banks can employ exchange rate and interest rate policies at their own discretion to contain inflation. Such practices can also emerge as a necessity in circumstances where economic aggregates no longer serve as a nominal peg. Prerequisites for the success of such a policy are: strong and sound financial structure, an observable and stable relationship between inflation and monetary policy tools, credibility, independence, accountability and transparency.

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