This was the case with the Swedish krona and several other European currencies at the beginning of the 1990s. With regard to inflation targeting, I am of course somewhat biased and for obvious reasons find it easier to point to advantages than disadvantages. One advantage is that a central bank which conducts inflation targeting is not tied to maintaining a particular exchange rate relationship, but can be more directly aimed at focussing on what is happening in the domestic economy. Another, partly related advantage – which I believe has been very important in Sweden’s case – is that inflation targeting means that one specific authority is given a clear responsibility for maintaining price stability. During the 1970s and 1980s it was not entirely clear where the responsibility for this lay in Sweden. One could say that the responsibility in practice had been delegated to the social partners, but that the total economic policy tended at the same time to be so expansionary that it became difficult to maintain wage and price increases at reasonable levels. A further advantage of inflation targeting is that the task of monetary policy, in the same way as with a fixed exchange rate regime, is easy for the general public to understand. If I am to try to find a disadvantage with inflation targeting, it could be that it is more difficult from a purely operational point of view for a central bank to steer inflation towards a particular level than to maintain a particular exchange rate relationship.
2  BIS Review 52/2006  Perhaps the foremost advantage of having a fixed exchange rate regime as a means of keeping inflation under control is that it makes the task of monetary policy simple and straightforward: it shall set the key rate in a way that enables the exchange rate relationship to be maintained. This task is also easy for the general public to understand. At the same time, it may be a disadvantage that monetary policy is tied to this single task. It cannot then be used to subdue domestic disruptions that have no equivalent in the country to which the currency is tied – the anchor country. At the same time, disruptions in the anchor country will immediately affect the targeting country as interest rate adjustments in the anchor country will lead to corresponding interest rate adjustments in the targeting country. If, for instance, the interest rate in the anchor country is raised because demand in that country is increasing, the interest rate in the targeting country must also be increased in order to maintain the exchange rate relationship, even if the country is in a recession. A fixed exchange rate regime thus means that it is not possible to conduct an independent monetary policy. The task of keeping the economy in balance and of steering inflation more directly cannot thus rest with the central bank. A fixed exchange rate relationship can also be exposed to speculative attacks if it is not entirely credible.