Managing the Expectations and Monetary Policy effectiveness: Role of Inflation Targeting

Abstract Effectiveness of monetary policy, to ensure the macroeconomic stability, depends on its capability to anchor the expectations of different markets’ players. This requires better understanding of the process through which expectations affect the economy and monetary policy stance affects the expectations. In a modern economy, full of complexities and uncertainties, rational agents take into account all possible unraveling of future economic events while making their decisions. Due to significant role of expectations in economic decisions, the expectations channel emerged as an effective mechanism to achieve monetary policy objectives. This paper discusses the best practices used by the central banks to anchor expectations and their application in emerging/developing economies to achieve the monetary policy goals of low inflation and stable economic growth