The Use and Meaning of Words in Central Banking: Inflation Targeting, Credibility, and Transparency

Inflation targeting offers the promise of introducing to monetary policy a logic and consistency that some central banks' deliberations sorely missed in the past. At least in today's inherited monetary policymaking context, however, inflation targeting also serves two further objectives that are of more questionable import, and while seemingly contradictory, the two are ultimately related: By forcing participants in the monetary policy debate to conduct the discussion in a vocabulary pertaining solely to inflation, inflation targeting fosters over time the atrophication of concerns for real outcomes. In the meanwhile, inflation targeting hides from public view whatever concerns for real outcomes policymakers do maintain. Both objectives are understandable. Whether either is desirable on economic grounds is an open question. Neither is very consistent with the role of monetary policy in a democracy.