The Rationale for Inflation Targeting

he decision to organize a country’s monetary strategy around the direct targeting of inflation rests upon a number of economic arguments about what monetary policy can and cannot do. Over the last twenty years, a consensus has been emerging in the economics profession that activist monetary policy to stimulate output and reduce unemployment beyond their sustainable levels leads to higher inflation but not to persistently lower unemployment or higher output. Thus, the commitment to price stability as the primary goal for monetary policy has been spreading throughout the world. Along with actual events, four intellectual developments have led the economics profession to this consensus.