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Avoiding significant monetary policy mistakes

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  • Preston J. Miller
  • Gary H. Stern

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.

Suggested Citation

  • Preston J. Miller & Gary H. Stern, 2004. "Avoiding significant monetary policy mistakes," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Dec, pages 2-9.
    • Handle: RePEc:fip:fedmqr:y:2004:i:dec:p:2-9:n:v.28no.2
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    References listed on IDEAS

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    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    2. Andrew Atkeson & Patrick J. Kehoe, 2004. "Deflation and Depression: Is There an Empirical Link?," American Economic Review, American Economic Association, vol. 94(2), pages 99-103, May.
    3. 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.
    4. 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.
    5. 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.
    6. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
    7. Jane E. Ihrig & Jaime R. 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.).
    8. Ben S. Bernanke, 2003. "Friedman's monetary framework: some lessons," Proceedings, Federal Reserve Bank of Dallas, issue Oct, pages 207-214.
    9. 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.
    10. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
    11. repec:pri:cepsud:83svensson is not listed on IDEAS
    12. 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.
    13. George T. McCandless & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
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    Cited by:

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

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    Keywords

    Monetary policy;

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