Conceptual note on inflation targeting types and their performance in anchoring inflation expectations

Since the early 1990s, inflation targeting has been widely adopted across the globe with the primary objective of maintaining price stability. Central banks formulate their inflation objective in a variety of ways: most of them use point targets, some use range targets, others a point with bands around it. A priori, the effect of adding tolerance bands or a range on how well inflation expectations are anchored is not clear. On the one hand, point targets are missed more often, which may undermine the public’s confidence in the inflation target, especially if realised inflation deviates from the point target consistently. On the other hand, missing a target range or a band could be even more detrimental to the credibility of the target, whilst the increased flexibility from these types might lead to more uncertainty about the exact future path of inflation, leading to less firmly anchored inflation expectations. In the wake of persistently low inflation for over a decade, the type of inflation target has received renewed interest in the academia. A proposed solution to the persistence of inflation at low levels has been to replace point targets for target ranges. Recent evidence in the literature, however, has not been strong enough to overrule the central conclusion from the past international debate between point target and range target, that monetary policy flexibility could be achieved even without an interval.