Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain. In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.

This is the second chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." We begin by discussing the costs of inflation, including their role in generating boom-bust cycles. Following a general discussion of the need for a nominal anchor, we describe a specific type of monetary anchor, the inflation-targeting regime, and its two key intellectual roots-the absence of long-run trade-offs and the time-inconsistency problem. We conclude by providing a brief introduction to the way in which inflation targeting works.

This paper investigates the performances of an inflation targeting regime in a learning economy whose functioning is tackled via an Agent-Based Model (ABM). While the structure of our ABM has features in common with those of the New Keynesian canonical modelling framework, we model the individual behaviour of the agents under procedural rationality in the sense of Simon (1971) [Simon, H., The Theory of Problem Solving, in 'IFIP Congress (1)', 1971, pp. 261-277]. Instead of assuming that households and firms fully optimize on an intertemporal basis beforehand, and make use of rational expectations in that respect, we assume that their behaviour is guided by simple rules of thumb - or heuristics - while a continuous learning process governs the evolution of those rules. Departures from the rational expectations equilibrium endogenously arise from that learning behaviour. Finally, the central bank implements an inflation targeting regime via a monetary policy rule. Our aim is then to analyse the interplay between the learning mechanisms operating at the individual level and the features and performances of the inflation targeting regime. In such a setting, we show the prime importance of the credibility of central bank's announcements regarding macroeconomic stabilization outcomes, as well as the beneficial role played by the inflation target as an anchoring device for private inflation expectations. We also demonstrate the potential welfare cost of imperfect public information and contribute to the debate on optimal monetary policy rule under imperfect common knowledge and uncertainty.

In a global games setup with imperfect commitment technology, we show that low targets - the ones close to the optimal inflation under perfect commitment - are unattainable, leading to a trade-off between low and credible targets. Moreover, since noisy public information helps to coordinate expectations around the announced target, our article supports unconventional policy prescriptions. First, weaker countries need to impose higher targets. Second, less transparency helps to make the announced target credible and then reduces the optimally announced target. Results are based on a general central bank loss function encompassing models traditionally used to discuss central bank decisions.

This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank's assessment - or the basis for monetary policy decisions - could complicate the private sector's learning about its policy response function. We show how clear central bank communication, which facilitates agents' understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model's quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.