Challenges for Inflation Targeting

Delano Villanueva

Working Papers from South East Asian Central Banks (SEACEN) Research and Training Centre

Abstract: This paper raises a very important question for inflation targeting (IT) central banks. Given the multiple objectives, should financial stability be an implicit objective of IT? It is argued that on a theoretical basis, there is no justification to include financial stability in the policy rule of the IT framework. In fact, the objectives of IT should just be inflation control and full employment. However, financial stability must naturally remain an important objective of central banks. Apart from a well-established and coordinated system of regulation and supervision of financial institutions, rigorous prudential policy should be the first line of defence to safeguard financial stability.

Keywords: Inflation Targeting; Price Stability; Financial Stability (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2015-10
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