Inflation targeting requires that monetary authorities adopt a forward-looking attitude and
take preemptive action, given the lags between policy decisions and their effect on output and
prices. In Alan Greenspan’s words, “Implicit in any monetary policy action or inaction is an
expectation of how the future will unfold, that is, a forecast.” Indeed, we believe that what
inflation-targeting central banks actually do is inflation forecast targeting. Rather than reacting to
present facts, monetary policymakers make decisions based on conditional forecasts of future
inflation, conditional on alternative interest rate paths and on the best estimate of the current state
of the economy and the probable future development of exogenous variables.