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Licensed Unlicensed Requires Authentication Published by De Gruyter December 18, 2009

Inflation Targeting: A Framework for Communication

Maria Demertzis and Nicola Viegi

We analyze how the provision of an explicit numerical inflation target provides a focal point for agents' expectations when information is imperfect. Communicating a target and a tolerance band around it provides a clear framework with which to evaluate monetary policy outcomes. We show how inflation targeting exploits the self-reinforcing loop between success and credibility to help the Central Bank endure large and long lasting shocks. Last, we derive the optimal band width around the target, which exploits the benefits of providing a focal point while maximizing the probability of success.

Published Online: 2009-12-18

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