SUPPORTING AN INFLATION TARGETING POLICY WITH THE MEASUREMENT OF INFLATION CREDIBILITY

Inflation targeting anchors inflation expectations, which are not within the sphere of control of the authorities, but can only be influenced over time by consistent policy. As public distrust of inflation figures will feed through to inflation expectations, this paper highlights pilot studies measuring the credibility of inflation in terms of an inflation credibility barometer. Despite initial discouraging results, the conclusion is that knowledge and information improve the credibility of inflation, but only one inflation rate (ideally the one used for inflation targeting purposes) should be communicated. Moreover, the rate used for targeting purposes should be specified with ease of communication in mind. INFLATION TARGETING as a monetary policy framework was introduced for the first time in 1990 by New Zealand. By adopting this framework, New Zealand introduced a monetary policy approach which clearly stated its ultimate objective: price stability. Inflation targeting was preceded in many countries by a policy of money supply growth targets. Owing to international financial integration, countries increasingly found that money supply growth targets no longer produced the desired results as an anchor for monetary policy. The scene was therefore set for a new approach to monetary policy, in the same way as direct credit controls had been replaced as a monetary policy framework by mone