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Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability

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Author Info
Svensson, Lars E. O. () (Institute for International Economic Studies, Stockholm University)

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Abstract

This paper discusses how price stability can be defined and how price stability can be maintained in practice. Some lessons for the Eurosystem are also considered. With regard to defining price stability, the choice between price-level stability and low (including zero) inflation and the decisions about the price index, the quantitative target and the role of output stabilization are examined. With regard to maintaining price stability, three main alternatives are considered, namely a commitment to a simple instrument rule (like a Taylor rule), forecast targeting (like inflation-forecast targeting) and intermediate targeting (like money-growth targeting). A simple instrument rule does not provide a substitute for a systematic framework for monetary policy decisions. Such a framework is instead provided by forecast targeting. Forecast targeting can incorporate judgemental adjustments, extra-model information, and different indicators (including indicators of "risks to price stability"). By extending mean forecast targeting to distribution forecast targeting, nonlinearity, nonadditive uncertainty and model uncertainty can be incorporated. Eurosystem arguments in favor of its money-growth indicator and against inflation-forecast targeting are scrutinized and found unconvincing.

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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 91.

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Length: 50 pages
Date of creation: 01 Sep 1999
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Publication status: Published in The Monetary Transmission Process: Recent Developments and Lessons for Europe, Deutsche Bundesbank, (eds.), 2001, pages 60-102, Palgrave, New York.
Handle: RePEc:hhs:rbnkwp:0091

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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Related research
Keywords: Inflation targeting Intermediate targeting Monetary targeting Eurosystem

Other versions of this item:

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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Full references

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.)

  1. Svensson, Lars E O, 2004. "Optimal Policy with Low-Probability Extreme Events," CEPR Discussion Papers 4218, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Svensson, Lars E.O. & Williams, Noah, 2005. "Monetary policy with model uncertainty: distribution forecast targeting," Discussion Paper Series 1: Economic Studies 2005,35, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  3. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization and Monetary Policy Institute Working Paper 08, Federal Reserve Bank of Dallas. [Downloadable!]
  5. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Lars E. O. Svensson, 2003. "Monetary Policy and Real Stabilization," NBER Working Papers 9486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Lars E.O. Svensson & Michael Woodford, 2000. "Indicator variables for optimal policy," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  8. Matthews, Kent & Meenagh, David & Minford, Patrick & Webb, Bruce, 2006. "Monetary Regimes: Is There a Trade-Off Between Consumption and Employment Variability?," CEPR Discussion Papers 5609, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Svensson, Lars E O, 2002. "The Inflation Forecast and the Loss Function," CEPR Discussion Papers 3365, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. O. Holtemöller, . "Structural Vector Autoregressive Models and Monetary Policy Analysis," Sonderforschungsbereich 373 2002-7, Humboldt Universitaet Berlin.
  11. Alsterlind, Jan & Markowski, Alek & Nilsson, Kristian, 2004. "Modelling the Foreign Sector in a Macroeconometric Model of Sweden," Working Paper 88, National Institute of Economic Research. [Downloadable!]
  12. Willem H. Buiter, 2006. "The elusive welfare economics of price stability as a monetary policy objective - why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank. [Downloadable!]
  13. Driffill, John & Rotondi, Zeno, 2004. "Monetary Policy and Lexicographic Preference Ordering," CEPR Discussion Papers 4247, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. Lavan Mahadeva & Alex Muscatelli, 2005. "National Accounts Revisions and Output Gap Estimates in a Model of Monetary Policy with Data Uncertainty," Discussion Papers 14, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
  15. Willem H. Buiter, 2004. "The Elusive Welfare Economics of Price Stability as a Monetary Policy Objective: Should New Keynesian Central Bankers Pursue Price Stability?," NBER Working Papers 10848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Svensson, Lars, 1999. "Monetary Policy Issues for the Eurosystem," Seminar Papers 667, Stockholm University, Institute for International Economic Studies. [Downloadable!]
    Other versions:
  17. Jose Vinals & Javier Valles, 1999. "On the real effects of monetary policy: a central banker's view," Working Papers 38, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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