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Avoiding significant monetary policy mistakes

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  • Preston J. Miller
  • Gary H. Stern
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    Abstract

    We deduce properties of optimal monetary policies based on modern theory and standard empirical findings. In light of this analysis, we examine FOMC policy procedures and conclude that they put too much emphasis on short-term economic stabilization and too little emphasis on longer-term price stability. We propose a form of inflation targeting to address this problem.

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    Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

    Volume (Year): (2004)
    Issue (Month): Dec ()
    Pages: 2-9

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    Handle: RePEc:fip:fedmqr:y:2004:i:dec:p:2-9:n:v.28no.2
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    Keywords: Monetary policy;

    References listed on IDEAS
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    1. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," International Finance Discussion Papers 761, Board of Governors of the Federal Reserve System (U.S.).
    2. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
    3. S. Rao Aiyagari, 1988. "Economic fluctuations without shocks to fundamentals; or, does the stock market dance to its own music?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 8-24.
    4. Andrew Atkeson & Patrick J. Kehoe, 2004. "Deflation and depression: is there an empirical link?," Staff Report 331, Federal Reserve Bank of Minneapolis.
    5. Miller, Preston J., 1993. "Optimal income tax in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 443-465, May.
    6. Lars E.O Svensson, 2002. "Monetary policy and real stabilization," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 261-312.
    7. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
    8. Kiley Michael T., 2003. "An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-26, March.
    9. Ben S. Bernanke, 2003. "Friedman's monetary framework: some lessons," Proceedings, Federal Reserve Bank of Dallas, issue Oct, pages 207-214.
    10. Satyajit Chatterjee & Dean Corbae, 2003. "On the welfare gains of eliminating a small likelihood of economic crises: A case for stabilization policies?," Working Papers 03-20, Federal Reserve Bank of Philadelphia.
    11. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
    12. Jane Ihrig & Jaime Marquez, 2003. "An empirical analysis of inflation in OECD countries," International Finance Discussion Papers 765, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. William Whitesell, 2005. "An inflation goal with multiple reference measures," Finance and Economics Discussion Series 2005-62, Board of Governors of the Federal Reserve System (U.S.).

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