It is not difficult to see why inflation targeting has had this effect. The approach forces the central bank to focus squarely on price stability in ways that earlier policy strategies did not. It thus offers transparency with respect to monetary-policy goals and the measures needed to achieve them, and these signals build public confidence.
Inflation targeting is widely regarded as the best approach to monetary policy, including for small, open economies.
Pioneered by New Zealand and Canada in the early 1990s — and quickly adopted by Australia, Sweden and the UK, and then Iceland and Norway, among others — it is credited with having dramatically lowered the level and variability of inflation wherever it has been consistently applied. Lower and predictable inflation has, in turn, proved conducive to better economic performance, helping to prevent the large shifts in income distribution that can follow from unexpected inflationary surges (at least until the Covid-19 pandemic struck).
