Inflation Targeting, Transparency and Expectations - a review of recent literature

This paper surveys the different modeling frameworks which have been proposed to address inflation targeting regimes and their economic outcomes, with a special emphasis on the role of transparency. The different phases of this modeling process highlight two functions of transparency. First, transparency acts indirectly on the incentives the central bank faces and thereby impinges on the inflation bias. Second, and mostly, by exerting a direct influence on private agents expectations, a transparent central bank is able to manage private expectations in order to achieve a better stabilization of both inflation and economic activity. To that respect, the assumption of perfect information has been first removed to assess how the central bank's information may acts as a coordination device of agents' expectations. The assumption of rational expectations has been then released to demonstrate how a public inflation target may make the expectation formation of agents easier. The argument also refers to empirical evidence.