View article

Interpretations of inflation targeting (IT) have ranged widely, from" inflation-only targeting" without regard for output, to cheap talk without effect, to transparency increasing flexibility without cost. We characterize five interpretations of the adoption of IT as shifts between strategies in a conventional model of monetary time-inconsistency. Their implications for central bank behavior are compared to the time-series properties of inflation, and to the response of interest rates to inflation movements, for three countries adopting IT in the early 1990s.