• C61;
  • E52;
  • E61
  • monetary policy;
  • inflation targeting;
  • constrained discretion;
  • medium term;
  • optimal horizon

This paper suggests a simple framework for modeling inflation targeting as constrained discretion. Although it is widely claimed that inflation targeting has been successful in maintaining low and stable inflation, an announcement of an inflation target does not by itself mean that central bankers are precommiting to how they conduct monetary policy. In comparison to the assumption of many theoretical studies, central banks conduct monetary policy in a discretionary fashion and rarely precommit to a rule in reality. Therefore, the central bank in this paper is modeled as discretionary, yet faced with a constraint, that an average of future inflation over a certain horizon should be kept on or near the preannounced target level. It is natural to add this constraint to the central banker’s optimization problem, since inflation targeting involves one way or another an evaluation of the performance over a certain horizon. So it is argued that the better outcome of inflation targeting does not come from a commitment but from “constrained discretion.” This paper also sheds some light on optimal targeting horizon.