Current literature on inflation targeting, based on the Barro-Gordon model, assumes no interaction between monetary and fiscal authorities. In this paper, inflation targeting is introduced in a model where monetary and fiscal policies interact strategically, taxes are distortional and the monetary authority is discretionary. Some Nash equilibria, under different institutional structures designed to improve policy outcomes, are discussed. In this framework, commitment, Rogoff's conservative central banker and inflation targeting, which are designed to reduce monetary authority inflation bias, can reduce society's welfare. The paper establishes the conditions for this to happen.
