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The Role of Output Stabilization in the Conduct of Monetary Policy

  • Mishkin, Frederic S

This paper examines the role of output stabilization in the conduct of monetary policy. It argues that activist monetary policy--in which the monetary authorities focus on output fluctuations in the setting of their policy instrument and in policy statements--is likely to produce worse outcomes for output and inflation fluctuations, because it will lead to suboptimal monetary policy, but also because it complicates monetary authorities' communication strategy and can weaken the credibility of the central bank. In contrast, conducting monetary policy with a flexible inflation target rule is likely to produce better outcomes. A flexible inflation target rule also allows the monetary authorities to communicate effectively to the public that they do care about output fluctuations, but makes it less likely that they will be encouraged to try to exploit the short-run trade-off between output and inflation. Copyright 2002 by Blackwell Publishers Ltd.

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Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 5 (2002)
Issue (Month): 2 (Summer)
Pages: 213-27

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Handle: RePEc:bla:intfin:v:5:y:2002:i:2:p:213-27
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  1. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  2. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-87, November.
  3. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  4. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  5. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  6. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  7. V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation Traps and Discretion," NBER Working Papers 5541, National Bureau of Economic Research, Inc.
  8. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  9. Aaron Drew & Adrian Orr, 1999. "The Reserve Bank's role in the recent business cycle: actions and evolutions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
  10. Frederic S. Mishkin, 2000. "What should central banks do?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-14.
  11. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  12. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  13. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May.
  14. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
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