ABSTRACT
The successes of inflation targeting monetary policies, first in some developed countries and then in emerging market economies, have generated an interest among policymakers in exploring the feasibility of adopting this type of monetary policy in order to overcome inflationary trends. However, it is widely understood that a hasty adoption of such a policy without the fundamental conditions being met could lead to its failure and provoke serious consequences not only in terms of inflation but also for the credibility of the monetary authorities. There are many economic, institutional and technical requirements for the implementation of an inflation targeting regime. One of the most important is that the central bank should be independent of the executive authorities, which implies the absence of any kind of fiscal dominance. Indeed, the channels through which fiscal policy can affect monetary policy are multiple (monetary financing of public deficits, hesitation in raising interest rates when desirable, effects on aggregate demand, etc). Since fiscal disequilibrium can hinder inflation control, lead to severe restrictions on monetary policy, or even to its failure, it is essential for an inflation targeting regime to be underpinned by a sound fiscal stance.
