| Definition |
Monetary policy strategy that aims to keep inflation within a specified range. |
Monetary policy strategy focused on maintaining a target interest rate level. |
| Primary Goal |
Stabilize prices and control inflation over the medium term. |
Control money supply and influence economic activity through interest rate levels. |
| Target Variable |
Inflation rate (e.g., 2% per annum). |
Short-term interest rate (e.g., repo rate or federal funds rate). |
| Approach |
Adjusts interest rates to steer inflation toward the target. |
Sets or adjusts interest rates to influence overall economic demand and liquidity. |
| Transparency |
Generally transparent; central banks often publicly announce inflation targets. |
May be less transparent if the rate-setting process is not well communicated. |
| Policy Instruments |
Interest rate changes, open market operations, reserve requirements. |
Primarily the short-term policy rate (e.g., repo or fed funds rate). |
| Communication |
Central banks commit to clear inflation targets and explain deviations. |
Focuses on signaling interest rate path and managing expectations. |
| Economic Impact |
Helps anchor inflation expectations and stabilize the currency value. |
Affects borrowing costs, investment, consumption, and exchange rates. |
| Flexibility |
May allow flexibility in the short term to address output or employment shocks. |
Less flexible if the focus is strictly on rate control regardless of inflation. |
| Examples |
India, UK, and Canada use explicit inflation targeting frameworks. |
U.S. Federal Reserve used interest rate targeting before adopting dual mandates. |
Inflation Targeting vs Interest Rate Targeting