A Project Report on
Inflation Targeting: Should Central Bank
go for it?
MG 667: Economic Environment and Policy
By
Vandana Priya Maturu (07927845)
Prasad Bhave (07927821)
1
INFLATION TARGETING
Definition
Inflation targeting framework refers to a set of economic policies adopted by the central
bank wherein it announces a projected or “target” inflation rate and strives to achieve that
figure using measures like interest rate changes and other monetary tools.
Elements of Inflation Targeting[1]
· Announcement of an explicit quantitative inflation target or range for some period
of time.
· Central bank must show clearly and unambiguously that its most crucial aim is to
provide an environment with stable prices.
· Central bank should have powerful models to make inflation forecasts.
· The central bank must have a forward-looking operating procedure in which the
setting of policy instruments depends on the assessment of inflationary pressures
and where the inflation forecasts are used as the main intermediate target.
Prerequisites for Inflation Targeting[1]
· Central bank should be able to conduct monetary policy with a degree of
independence.
· Absence of another targeted variable such as wages, level of employment, or the
nominal exchange
· Existence of stable and predictable relationship between the monetary policy
instruments and inflation rate.
Issues with the implementation of Inflation Targeting
1. Time inconsistency situations
Time inconsistency situations may occur because the central bank would try to
reoptimize in the short term and lose sight of the long term goals. The bank may
start out with a particular policy and then keep changing its policy to suit some
shor ...