Economic Themes (2013) 51 (2) 4, 293-312


Milivoje Davidović, Marina Grubor, Husein Mehmedović

Abstract: Inflation targeting is prognostically oriented strategy, using as an anchor expected inflation, focused low and stable inflation rate (numerical target or target range with a midpoint) as the ultimate goal. In relation to the loosening commitment to uniform, “softer version” (flexible inflation targeting) implies coexistence of more goals, but clearly the hierarchy and priority of monetary stability in the operationalization of monetary policy. Design, implementation and evaluation of an inflation targeting strategy involves the establishment of institutional mechanisms as an effective monetary management attributes: independence and accountability of the central bank, the absence of fiscal dominance, the transparency of monetary policy, exchange rate flexibility, harmony and a shared responsibility of the monetary and fiscal authorities. Additional conditions concerning the general economic environment: price stability, the absence of external and structural dominance, the fiscal balance, the developed and robust financial sector. The effects of inflation targeting could be seen as positive, in order to reduce the average level of inflation, inflation expectations, reducing the volatility of economic growth, with a neutral impact on the average economic growth. The empirical analysis also suggests that the “rate of sacrifice” production during disinflation is lower by as much as 7% in countries that implement inflation targeting, as compared to other countries that apply the monetary strategy.

Keywords:  inflation; the central bank; inflation expectations

PDF file