Introduction to Monetary Policy and Inflation Targeting

Medium-term price stability is widely accepted as the appropriate ultimate goal for monetary policy. This reflects two ideas. The first is that high rates of inflation distort decision-making, ultimately leading to slower economic growth. The second is that monetary policy is the most effective instrument in influencing medium-term inflation outcomes. By pursuing a strategy that ensures that inflation does not distort decisions concerning investment, production and savings, monetary policy is best able to contribute to sustainable improvements in living standards. A variety of monetary-policy frameworks is consistent with achieving this objective, although there has been a shift over recent years to forms of inflation targeting. Even in countries without an explicit inflation target, there is often a strong commitment to an implicit medium-term inflation objective. Further, countries that have chosen to fix their exchange rate have typically done so against a country with some form of implicit or explicit inflation objective.