Guy Debelle, Mr. Miguel A Savastano, Mr. Paul R Masson, and Mr. Sunil Sharma
Inflation distorts prices, erodes savings, discourages investment, stimulates capital flight, inhibits growth, and makes economic planning a nightmare. During the past decade, several advanced economies have taken a new approach to the age-old problem of controlling inflation through monetary policy known as "inflation targeting." This pamphlet explains the requirements of putting the new policy in place, the experience of the countries that have tried it, and whether it has applicability to developing countries.
Australia’s economic performance has been impressive in recent years. Growth has been healthy, with real output climbing by more than 25 percent between the 1991 cyclical trough and the end of 1997. Moreover, in contrast with previous cycles, this growth has been evenly paced; “boom-and-bust” experiences have been avoided, and the expansion has been well balanced on both the demand and supply sides. Another striking aspect of this recovery has been the low rate of inflation. Since 1991, underlying inflation has averaged just 2¼ percent, and has never exceeded 3⅓ percent. Thus, with respect to both growth and inflation, Australia has compared very favorably with other Organization for Economic Cooperation and Development (OECD) countries in the 1990s.