In recent years a growing consensus has emerged for price stability as
the long-run goal of monetary policy. However, the following question still remains: how should monetary policy be conducted to achieve the price stability goal? A central feature of all of monetary regimes is the use of a nominal anchor in some form, so we will examine what role a nominal anchor plays in promoting price stability, and then basic types of monetary policy regimes including inflation targeting will be discussed.
In theory, an inflation target is relatively straightforward. The central bank forecasts the future path of inflation; the forecast is compared with the target inflation rate; the difference between the forecast and the target determines the required adjustment of the monetary policy instrument. However, the experience to date of inflation targeting countries has identified a number of complex operational and institutional issues.
This paper examines the relevene of inflation Targeting for the Iranian economy and identifies the two major prerequisites of this monetary policy framework: (1) the ability to carry out a substantially independent monetary policy with more transparency and accountability, especially one not constrained by fiscal considerations; and (2) freedom from commitment to another nominal anchor like the exchange rate. The basic theme that comes out of this analysis is that the success of this monetary regime in the Iranian economy needs to a transition stage for preparation of necessary conditions.