Inflationtargeting(IT)--a policy frameworkthat directly targets an explicit inflation goal--hasgained widespreadattentionrecently as it has been adoptedby several OECD countries. There is a growing body of literatureon the ultimate long-termbenefits of price stabilityand on theoretical issues related to inflationtargeting. But the short durationof this practice has limitedthe number of works that empiricallyanalyzethe performanceof IT regimes. This paper examinesthe British inflationtargeting

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... periencesince 1993by focusingon the out-of-sampleforecast performanceof models fitted to the 1980s. The model over-predicts actual short-term and long-term interest rates, while it's inflation forecast is on track for the recent period. This implies that it took less monetary tightening to obtain a favorable inflation outcome. Identical exercises were repeated for France and the US, countries that have not adopted IT but have experienced low inflation in the recent period. The results for these countries show that recent low inflation has not been unusual when compared to forecasts from the models designed to fit the second half of the 1980s. That is, given the level of inflation, the degree of actual monetary policy tightness (measured in terms of short-term interest rate) is about what the model expects. Findings of this paper could be explained by enhanced credibility of the UK monetary policy since the adoption of IT.