Limits to Inflation Targeting

Abstract

Inflation targeting may do more harm than good if there is a substan- tial chance that the central bank cannot in fact control inflation. A prerequisite for central bank control of inflation is appropriate coordination with or backup by fis- cal policy, and the nature of the required coordination will depend on whether and how central bank independence from the fiscal authority has been implemented. These considerations suggest that in those countries where inflation control has in the past been most difficult, inflation targeting may be least useful. Where inflation control has in the past been successful, the benefits of inflation targeting may have more to do with the associated changes in the policy process and in the central bank's communication with the public than with the inflation target itself.