INFLATION TARGETING AS A WAY OF PRECOMMITMENT

This paper considers an institutional arrangement in which the governm ent assigns a publicly-announced inflation target to an instrument-ind ependent central bank, but retains the discretion to revise the inflat ion target after wages have been set. We argue that since this arrange ment is transparent, it solves Canzoneri's private information problem , ensures perfect monitoring of the government, and makes reputational forces more effective. Cases are characterized in which, for this rea son, inflation targeting mitigates the inflationary bias of monetary p olicy.