What is Inflation Targeting and How Does it Stabilize Output?

I’ve discussed inflation targeting here, here, and here. Brad DeLong mentions it here, and New Economist mentions it here.

What is inflation targeting? Here's how Ben Bernanke and Frederic Mishkin describe it in "Inflation Targeting: A New framework for Monetary Policy?" (JSTOR link):

This approach is characterized, as the name suggests, by the announcement of official target ranges for the inflation rate at one or more horizons, and by the explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy. Other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers, and, in many cases, increased accountability of the central bank for attaining those objectives.

From Ben S. Bernanke; Frederic S. Mishkin, The Journal of Economic Perspectives, Vol. 11, No. 2. (Spring, 1997), pp. 97-116.

But what about output stabilization, doesn’t a commitment to an inflation target abandon output stabilization goals? The answer is no according to new rules based approaches to monetary policy that seek to stabilize the welfare relevant concept of the output gap.

In sticky wage and price models instability in the general price level associated with inflation causes relative price distortions. The relative price distortions lead to inefficient sectoral allocations of resources and inefficient variation in both aggregate employment and output.

Because price stability leads to smaller price distortions and less inefficient variation in output and employment, and less sectoral imbalance in resource allocation, the goal of price stability is consistent with the goal of output stability. Woodford pages 5 and 13 in the introduction, and Chapter 6, "Inflation Stabilization and Welfare" discusses this in detail.

Not all economists agree that the Fed should commit to inflation rules as implied by these models, but many do, and I am one of them. If the Fed is headed towards more transparency and more commitment to inflation targeting, and I believe that it is, then Bernanke or Hubbard, among others, would help to steer the Fed in this direction.