Credibility and Targeting Expected Inflation

This paper evaluates inflation targeting in the context of recent theoretical developments concerning the issue of creditability. The first part of the paper argues that the problems of operational and political credibility inherent in a reputation based inflation targeting policy would be avoided by a rule based inflation expectation targeting policy. The second part of the paper demonstrates that the inflation expectation required to implement this policy, embodied in financial market bond yields, could be accurately and continuously extracted by issuing the appropriate instruments.