'''Inflation targeting''' is an economic policy in which a [[central bank]] estimates andor makesdecides publicfor a projected,medium-term or "target", [[inflation]] rate and thenmakes public this "inflation target". Then the central bank attempts to steer with short-term instruments at its own discretion actual inflation towards thethis target through the use of [[interest rate]] changes and other monetary tools.<ref>{{Cite news
<ref>{{cite web |url=http://www.imf.org/external/pubs/ft/fandd/basics/target.htm |title=Inflation Targeting: Holding the Line |last=Jahan |first=Sarwat |publisher=International Monetary Funds, Finance & Development |accessdate=28 December 2014}}</ref>
Because interest rates and the inflation rate tend to bemove directlyin relatedopposite directions, the likely moves of the central bank to raise or lower interest rates become more transparent under the policy of inflation targeting. Examples:
* if inflation appears to be above the target, the bank is likely to ''raise'' interest rates. This usually (but not always) has the effect over time of cooling the economy and bringing down inflation.
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* if inflation appears to be below the target, the bank is likely to ''lower'' interest rates. This usually (again, not always) has the effect over time of accelerating the economy and raising inflation.
Under thethis monetary policy of inflation targeting, the uncertainty among investors is reduced as they know what the central bank considers the target inflation rate to be and therefore may more easily factor in likely interest rate changes in their investment choices. Further on, inflation targeting is able to combine two contradicting monetary policies directions: it combines a rule-based approach with a discretion-based approach as a precise numerical target is given for inflation in the medium term and a response to economic shocks in the short term. This is also called a “constrained discretion” framework. These aspects are viewed by inflation targeters as leading to increased economic stability, also in financial crisis situations. <ref>{{cite web |url=http://www.imf.org/external/pubs/ft/fandd/basics/target.htm |title=Inflation Targeting: Holding the Line |last=Jahan |first=Sarwat |publisher=International Monetary Funds, Finance & Development |accessdate=28 December 2014}}</ref>
