Verðbólgumönnun

Verðbólgumönnun is a monetary policy framework in which a central bank commits to achieving an explicit target for inflation. The aim is price stability, which helps to anchor expectations, reduce uncertainty, and support sustainable economic growth and employment over time. The target is typically publicly announced, and the central bank explains its policy plan and outlook to maintain accountability.

Key elements include a clearly defined inflation target or target range, an independent central bank, and a policy framework in which inflation outcomes guide policy decisions. The main tool is usually the policy interest rate, supplemented by communication, forward guidance, and, in some cases, macroprudential measures. The central bank continually forecasts inflation and reports on its outlook, policy actions, and progress toward the target.

How it operates: the central bank adjusts policy rates to steer inflation toward the target over an evaluation horizon. If inflation threatens to overshoot or undershoot, the bank responds by altering rates and using communication strategies to influence expectations. Policy is designed to be transparent, with regular publication of forecasts and rationales, and it accepts some short-term trade-offs between inflation and other goals, such as output or employment, within an overall commitment to price stability.

Advantages and criticisms: inflation targeting offers clarity, credibility, and a clear anchor for expectations, aiding policymaking and reducing discretion. Critics point to challenges from supply shocks, the risk of overemphasizing inflation at the expense of other objectives, and the difficulty of measuring inflation accurately or communicating uncertain forecasts.

In Iceland, verðbólgumönnun has been the framework guiding monetary policy since the early 2000s, with price stability as the primary objective and the Central Bank of Iceland responsible for implementation and transparency.