Question

Why might inflation targeting increase support for the independence of the central bank in conducting monetary policy?

Short answer

Because of greater transparency in policymaking, increased accountability, and, most importantly, public support, the central bank pursues an inflation-targeting monetary policy on its own.

Step-by-step solution

Concept Introduction

Monetary policy is the central bank's macroeconomic policy. It entails changes in the money supply and interest rate in order to achieve macroeconomic goals such as inflation, output growth, and employment.

Explanation

Inflation targeting is a central bank monetary policy in which the rate of inflation is fixed and targeted as its goal, and the fixed rate of inflation is announced to the public.

Because of greater transparency in policymaking, increased accountability, and, most importantly, public support, the central bank pursues an inflation-targeting monetary policy on its own.

The success of well-defined inflation targeting monetary policy would boost public support for central bank's independence and policies.