In this paper, I survey the existing literature and examine three related questions: (1) What inflation rate constitutes the appropriate target for the central bank? (2) What is an operational definition of price stability for the conduct of monetary policy? (3) What is the policy framework for pursuing price stability in practice? In doing so, I emphasize that it is crucially important for a central bank to seek to maintain a price environment that is neither inflationary nor deflationary and is consistent with stability of the economy in the long run. I propose two definitions of price stability, gmeasured price stabilityh and gsustainable price stability.h I argue that g sustainable price stabilityh should be the fundamental goal for monetary policy. Although, from the viewpoint of accountability, gmeasured price stabilityh is important as a quantitative yardstick by which to evaluate policy achievement, it should not be the justification for preventing the central bank from its pursuit of gsustainable price stability.h Since observed changes in price indices are affected by various types of external shocks and measurement errors, it is indeed quite difficult to assess whether the underlying rate of inflation is stable or not. Therefore, even if gmeasured price stabilityh seems to be maintained, a central bank may need to alter interest rates promptly if it judges that the maintenance of gsustainable price stabilityh is at risk. In this sense, it is deemed important to construct a framework for monetary policy designed to maintain policy flexibility with a high degree of transparency by properly ensuring consistency between g measured price stabilityh and gsustainable price stability.h The current policy framework adopted by the Bank of Japan can be viewed as aiming at a kind of gconstrained discretionh by restricting pure discretion under open independence in line with this direction.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
For technical questions regarding this item, or to correct its listing, contact: (Kinken) The email address of this maintainer does not seem to be valid anymore. Please ask Kinken to update the entry or send us the correct address..
Related research
Keywords:
Other versions of this item:
Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)