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Inflation Targeting Isn’t for Everyone

While inflation targeting is a good strategy for many economies, extremely open economies tend to be too exposed to exchange-rate movements for this standard approach to work consistently over time. Fortunately, they can look to Singapore and Switzerland for a promising alternative model.

ZURICH – 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 United Kingdom, 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).