Inflation Targets - What Factors Can Help to Explain Their Levels

Abstract

Inflation targeting is nowadays used by around 40 countries, with each of
them tailoring some features of the strategy to its own needs. This holds
especially for deciding on the level of inflation targets. The analysis conducted
in the paper aims at identifying factors affecting the choice of the target
levels, with macroeconomic, structural and institutional characteristics of the
reviewed economies being investigated. The main conclusion is that both
backward- and forward-looking models can help to explain how inflation targets
are set. Evidently inflation and GDP growth (past and forecast) together with
information on a possibly ongoing disinflation process are of key importance,
but – especially for emerging market economies – also inflation variance and the
level of economic development seem to influence the target levels. Moreover,
many of the institutional features related, among others, to transparency and
accountability of the reviewed central banks, were found significant in the
analysis.