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Some Issues in Inflation Targeting

This paper discusses some of the operational issues relevant to the implementation of an inflation-targeting regime. In particular it focuses on: whether inflation targeting is 'new'; whether (and how) the forward-looking nature of inflation-targeting helps to prevent instabilities in inflation; whether inflation-targeting potentially destabilises output; and whether it requires too much knowledge on the part of the authorities. The paper argues that none of these propositions is in general correct. It goes on to discuss the use of inflation forecasts in general, and inflation probability distributions in particular, in the context of inflation targeting in the United Kingdom. It also discusses the important role greater transparency plays among inflation targeters and discusses some evidence on this. Finally, a preliminary evaluation of inflation targeters' performance to date is given.