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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. 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.
    2. Michael T. Kiley, 2001. "An analytical approach to the welfare cost of business cycles and the benefit from activist monetary policy," Finance and Economics Discussion Series 2001-41, Board of Governors of the Federal Reserve System (U.S.).
    3. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting 'M' back in Monetary Policy," NBER Working Papers 9552, National Bureau of Economic Research, Inc.
    4. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series 1999-12, Board of Governors of the Federal Reserve System (U.S.).
    5. 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.
    6. 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.).
    7. 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.
    8. repec:pri:cepsud:83svensson is not listed on IDEAS
    9. Andrew Atkeson & Patrick J. Kehoe, 2004. "Deflation and depression: is there an empirical link?," Staff Report 331, Federal Reserve Bank of Minneapolis.
    10. Lars E.O. Svensson, 2002. "Monetary Policy and Real Stabilization," Working Papers 119, Princeton University, Department of Economics, Center for Economic Policy Studies..
    11. 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.
    12. Ben S. Bernanke, 2003. "Friedman's monetary framework: some lessons," Proceedings, Federal Reserve Bank of Dallas, issue Oct, pages 207-214.
    13. George T. McCandless & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
    14. 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.
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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 (U.S.).

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