The danger of inflation has been the focus of many central banks.This paper analyzes the transmission mechanism of monetary policy and inflation targeting in Malaysia with a Rug Large backward-looking aggregate supply and demand analysis.The manage floating regime applied in the country has an important role in achieving a stable exchange rate against its major trading partners.It also analyzes the policy of maintaining the soundness of interest rate to perceive inflation targeting to increase its economic growth.Using 1991-2004 data and a traditional structural econometric model, it shows that output gap Disposable is important in forecasting a domestic inflation rate by controlling the interest rate.
Keywords: Inflation targeting, monetary economics, structural econometric model JEL classification numbers: E3, E52.