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Monetary Policy Issues in a Low Inflation Environment

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  • Viñals, José
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    Abstract

    One of the most striking macroeconomic phenomena in recent decades has been the achievement of rather low and more stable rates of inflation in many countries. Consequently, the main goal of this Paper is to offer an overview of the main policy issues arising in a low inflation environment and their practical relevance so as to identify the main challenges facing central bankers in such an environment. The Paper asks the following questions: To what extent are the public's attitudes towards price stability relative to other economic objectives – like unemployment – likely to change over time? How can the effectiveness of monetary policy change as a result of the non-linearities associated with the zero bound on nominal interest rates, the supposedly higher degree of downward real wage rigidity and, in general, the presence of downward nominal wage or price rigidities? What does the low inflation environment imply about the relative importance and effects of supply shocks, ‘non-monetary‘ demand shocks and ‘monetary‘ demand shocks? What sort of indicators are like to be more useful to the central bank for assessing inflationary pressures and, in particular, should asset prices play a bigger role in the conduct of monetary policy?

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2945.

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    Date of creation: Sep 2001
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    Handle: RePEc:cpr:ceprdp:2945

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    Related research

    Keywords: credibility; financial stability; inflation; monetary policy; prices stability;

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    References

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    Cited by:
    1. Goodfriend, Marvin, 2002. "Monetary Policy in the New Neoclassical Synthesis: A Primer," International Finance, Wiley Blackwell, vol. 5(2), pages 165-91, Summer.
    2. Tamim Bayoumi & Silvia Sgherri, 2004. "Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy," IMF Working Papers 04/24, International Monetary Fund.
    3. Alicia García Herrero & Pedro del Río, 2003. "Financial stability and the design of monetary policy," Banco de Espa�a Working Papers 0315, Banco de Espa�a.
    4. Alicia García Herrero & Pedro del Río López, 2003. "Implications of the design of monetary policy for financial stability," Macroeconomics, EconWPA 0304008, EconWPA.
    5. Silvia Sgherri & Tamim Bayoumi, 2004. "Monetary Magic? How the Fed Improved the Supply Side of the Economy," Econometric Society 2004 Australasian Meetings 20, Econometric Society.
    6. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank, Research Centre.

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