Many Central Banks have adopted inflation targeting in response to failed monetary policies not as a way of new economic thinking. Inflation targeting was dubbed “constrained discretion” as it combines both rules and discretion for the Central Bank taking part. The elements of an inflation targeting regime are as follows:

1. Price stability is explicitly recognised as the main goal of Monetary Policy.
2. There is a public announcement of a quantitative target for inflation.
3. Monetary policy is based on a wide set of information, including an inflation forecast.
4. Transparency.
5. Accountability mechanisms

Most of the countries that have moved to inflation targeting have done so as part of political and economic reform to strengthen the institutional structure of policymaking.

Chart 1 below illustrates the 27 countries currently operating an inflation targeting regime, the date they started the process and the inflation rate at the beginning of the process.

As illustrated above many countries including the United Kingdom and Australia embarked on Inflation Targeting when their inflation rates were low, UK 4% and Australia 2%. This highlights the studies that suggest the Inflation Targeting may not be the best way to help inflation decrease but it is an effective way of anchoring inflation levels around a target and keeping inflation at a low and stable rate.

Key for inflation targeting is operational independence for the Central Bank involved, all of the 27 countries above have this and 15 of them jointly determine the inflation target with the government. The involvement of the government in setting the target many believe helps with public support towards the target and the Inflation Targeting regime overall. In nine countries central bank sets the target, and in three countries, Norway, South Africa and the United Kingdom, the target is set by the government (Chart 2).