Optimal Inflation Targeting: Further Developments of Inflation Targeting

Inflation targeting was first introduced in 1990, in New Zealand. Since then it has been adopted by more than twenty countries. This period of fifteen years has seen major progress in practical monetary policy. In particular, the practice of inflation targeting has led to a more systematic and consistent internal decision process (Brash, 2000; Sims, 2002; Svensson 2001a); much more transparent communication with the private sector (Blinder and others, 2001; Fracasso, Genberg, and Wyplosz, 2003; Leeper, 2003); and an unprecedented degree of accountability. The monetary and real stability achieved is exceptional from a historical perspective (King, 2002). Given this progress, many might think that further improvement is hardly possible, and that monetary policy bliss, or something very close to it, may have been reached. I believe that there is still room for further development and improvement, even though past achievements by inflation-targeting central banks have been very impressive. This paper provides a very selective discussion of points on which I believe further improvements are both possible and desirable. Good inflation targeting shares these characteristics: • An explicit monetary policy objective in the form of a numerical inflation target, now with an increasingly explicit concern not