The evolution of inflation-targeting regimes Over their short history, inflation-targeting regimes have evolved to give central banks greater flexibility in conducting monetary policy. Mervyn King calls regimes which take no account of output gaps 4 (where the coefficient on the output gap is zero in the loss function) "inflation nutters."
The first of these (monitoring capital flows, currency boards and foreign exchange controls) has to do with resolving the so-called “impossible trinity” problem. Since a country cannot simultaneously have free capital flows, a fixed exchange rate and an independent domestic monetary policy, what should be given up?