Inflation targeting is a monetary policy where a central bank sets an explicit target for the inflation rate for the medium-term and announces this target to the public. The central bank then adjusts monetary policy to achieve the target inflation rate. The goal of inflation targeting is to maintain price stability, which is believed to support economic growth and stability.

Here are some key features of inflation targeting:

• Target Inflation Rate: The central bank estimates and makes public a projected, or “target,” inflation rate. The target inflation rate is the rate the government believes is appropriate for the economy. Most countries have set their inflation targets in the low single digits.

• Adjustment of Monetary Policy: The central bank forecasts the future path of inflation and compares it with the target inflation rate. The difference between the forecast and the target determines how much monetary policy has to be adjusted.

• Medium-Term Focus: Rather than focusing on achieving the target at all times, the approach has emphasized achieving the target over the medium term—typically over a two- to three-year horizon. This allows policy to address other objectives—such as smoothing output—over the short term.

• Transparency: Inflation targeting provides a rule-like framework within which the central bank has the discretion to react to shocks. If the target is published, inflation targeting also allows for greater transparency in monetary policy.

Inflation targeting has been successfully practiced in many countries, including New Zealand, Canada, the United Kingdom, Sweden, Finland, and the United States. However, there is some controversy over whether the target inflation rate is justified, with some economists arguing for a higher target.