INFLATION TARGETING - THEORY AND POLICY IMPLICATIONS

As with many monetary policy frameworks, inflation targeting is subjec t to the well-known problem of inflation bias. With inflation targetin g, however, the bias becomes apparent not as inflation above desired l evels but as a wedge between the announced target and observed inflati on. This inconsistency could render the framework neither credible nor enforceable because the target is overshot on average. The problem ca n be addressed by assigning price stability as the single policy objec tive or by assigning dual targets for inflation and output, provided t hat they are consistent. Many inflation-targeting countries take the j oint target approach implicitly through transparency measures that pub licly assess monetary, conditions in terms of potential output and out put Saps.