Monetary Policy Design.

How should governments and central banks use monetary policy to create a healthy economy?

Traditionally, policymakers have used such strategies as controlling the growth of the money supply or pegging the exchange rate to a stable currency. In recent years, a promising new approach has emerged: publicly announcing and pursuing specific targets for the rate of inflation. This book is the first in-depth study of inflation targeting. Combining penetrating theoretical analysis with detailed empirical studies of countries where inflation targeting has been adopted, the authors show that the strategy has clear advantages over traditional policies.…

The authors argue that the simplicity and openness of inflation targeting make it far easier for the public to understand the intent and effects of monetary policy. This strategy also increases policymakers’ accountability for inflation performance and can accommodate flexible, even ‘discretionary’, monetary policy actions without sacrificing central banks’ credibility.… They show that these countries have seen lower inflation, lower inflation expectations and lower nominal interest rates, and found that one-time shocks to the price level have less of a ‘pass-through’ effect on inflation.

These effects are improving the climate for economic growth, but the authors warn that the success of inflation targeting depends on operational details, such as how the targets are defined.