ABSTRACT
Material increases in a nation’s standard of living stem from increases in the quality and supply of labor, the quantity of capital that it works with, and changes in technology. Sound monetary policy, by providing a consistent value for dollar-based transactions, encourages long-range planning and leads to what economists call intertemporal utility maximization: the highest sustainable position of economic well-being over time. The basic idea of inflation targeting is that the monetary authority is precommitted to achieve a specified inflation objective. The central bank bases its policy actions on predicted deviations between actual inflation and this prespecified target. Anticipating potential problems, policymakers generally build certain flexibilities into inflation-targeting regimes. Many nations adopt a price index that not only excludes such volatile components as energy and food prices, but also eliminates indirect government taxes and mortgage interest payments.
