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Published online by Cambridge University Press: 05 October 2010
[T]he most important distinguishing characteristic of inflation target regimes is the emphasis that they place on transparency and accountability.
Mervyn King (1997: 439)Introduction
The consensus view among policymakers and academics alike is that the introduction of inflation targeting increases the transparency of monetary policymaking (King 1997; Bernanke et al. 1999; Svensson 1999; Mishkin and Schmidt-Hebbel 2001; Faust and Henderson 2004). Following Geraats (2002), transparency can be thought of as the removal of information asymmetries. Geraats catalogues five areas of monetary policymaking in which transparency could affect outcomes: (i) the central bank's objectives and its institutional relationship with the rest of government; (ii) the publication of data and forecasts; (iii) internal decision-making; (iv) the communication and explanation of policy changes; and (v) details of the implementation of policy.
These in turn give rise to five elements of transparency (political, economic, procedural, policy and operational). The introduction of IT is widely held to increase political transparency, by forcing the central bank to specify both the variable that it is targeting (some measure of consumer price inflation) and a precise numerical target for the targeted variable, as well as – in many cases – delineating more clearly the division of responsibilities between the bank and the political authorities (King 1997; Eijffinger and Geraats 2006).
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