Inflation Targeting

Abstract

There is wide agreement about the major goals of economic policy: high employment, stable prices and rapid growth. There is less agreement that these goals are mutually compatible or, about the terms at which they can and should be substituted for one another. There is least agreement about the role that various instruments of policy can and should play in achieving the several goals. Monetary policy represents by far the most important constituent in overall economic policy arsenal of authorities besides fiscal policy, exchange rate policy. Backed by experience and strong empirical support, academics and policy makers agree that an appropriate monetary policy framework is most suitable to achieve price stability. Over the years, different countries have experimented with different monetary policy frameworks to achieve price stability viz. monetary targeting, interest rate targeting, inflation targeting and exchange rate targeting. There is an increasing focus on inflation targeting as a framework for implementing monetary policy. Inflation targeting may be defined as a framework for policy decisions in which the central bank makes an explicit commitment to conduct policy to meet a publicly announced numerical inflation target within a particular time frame. Some countries have adopted point targets while others are following a more flexible approach of targeting inflation within a band. The paper explores process of inflation targeting in developing countries and India.