Inflation Targeting Strategy

Inflation targeting strategy is a systematic plan of action adopted by the central bank to maintain the economic stability of the country. The central bank estimates and make public a policy target agreement by fixing a specific inflation target.

Components of inflation targeting

Inflation targeting is a monetary policy strategy, developed not long before the present. Inflation targeting strategy comprises five primary components, which are as follows:

• The medium-term numerical inflation targets should be through the public announcement.
• The primary objective of monetary policy is to maintain the price stability and the Central bank should be committed in implementing that policy.
• Policy instruments should be fixed through various monetary tools including monetary aggregates and exchange rate.
• For maintaining transparency of the monetary policy, the plans, objectives, and decisions of the monetary authorities should be communicated to the public.
• Increased accountability is also a significant component to be considered while setting inflation targeting.

The central bank of the country normally considers the above five components for attaining it’s inflation targeting objectives.

Inflation targeting strategy setting is an important factor to be considered specifically for the countries having an emerging market. This is because of the fact that many of these countries routinely set numerical inflation targets as part of the government’s economic plan. Under normal conditions, central banks opt for long-run inflation targets above zero with midpoint of target ranging from one to three percent.

Inflation targeting strategy types

• Symmetrical inflation target: It is the necessity placed on a central bank to resolve when inflation is too low or too high. The Bank of Canada and Bank of England have symmetrical inflation targets.
• Non-symmetrical inflation target: In this case, the central bank forced to take action, in the event when inflation is too high. The European Central Bank has non-symmetrical inflation target.

The advantage of applying symmetrical inflation targeting strategy is that it helps central banks to stabilize real output. Inflation targeting also has the key advantage that it is easily understood by the public and is thus highly transparent.