IDEAS home Printed from https://ideas.repec.org/a/ime/imemes/v19y2001i2p49-83.html
   My bibliography  Save this article

Is There a Desirable Rate of Inflation? A Theoretical and Empirical Survey

Author

Listed:
  • Shiratsuka, Shigenori

    (Institute for Monetary and Economic Studies, Bank of Japan)

Abstract

In this paper, I survey the existing literature and examine three related questions: (1) What inflation rate constitutes the appropriate target for the central bank? (2) What is an operational definition of price stability for the conduct of monetary policy? (3) What is the policy framework for pursuing price stability in practice? In doing so, I emphasize that it is crucially important for a central bank to seek to maintain a price environment that is neither inflationary nor deflationary and is consistent with stability of the economy in the long run. I propose two definitions of price stability, "measured price stability" and "sustainable price stability." I argue that "sustainable price stability" should be the fundamental goal for monetary policy. Although, from the viewpoint of accountability, "measured price stability" is important as a quantitative yardstick by which to evaluate policy achievement, it should not be the justification for preventing the central bank from its pursuit of "sustainable price stability." Since observed changes in price indices are affected by various types of external shocks and measurement errors, it is indeed quite difficult to assess whether the underlying rate of inflation is stable or not. Therefore, even if "measured price stability" seems to be maintained, a central bank may need to alter interest rates promptly if it judges that the maintenance of "sustainable price stability" is at risk. In this sense, it is deemed important to construct a framework for monetary policy designed to maintain policy flexibility with a high degree of transparency by properly ensuring consistency between " measured price stability" and "sustainable price stability." The current policy framework adopted by the Bank of Japan can be viewed as aiming at a kind of "constrained discretion" by restricting pure discretion under open independence in line with this direction.

Suggested Citation

  • Shiratsuka, Shigenori, 2001. "Is There a Desirable Rate of Inflation? A Theoretical and Empirical Survey," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 49-83, May.
  • Handle: RePEc:ime:imemes:v:19:y:2001:i:2:p:49-83
    as

    Download full text from publisher

    File URL: https://www.imes.boj.or.jp/research/papers/english/me19-2-3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193, National Bureau of Economic Research, Inc.
    2. Hsiao, Cheng & Fujiki, Hiroshi, 1998. "Nonstationary Time-Series Modeling versus Structural Equation Modeling: With an Application to Japanese Money Demand," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(1), pages 57-79, May.
    3. Alan Greenspan, 1996. "Opening remarks," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 1-5.
    4. Koichiro Kamada & Ichiro Muto, 2000. "Forward-looking Models and Monetary Policy in Japan," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    5. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, December.
    6. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202, National Bureau of Economic Research, Inc.
    7. J. Bradford DeLong, 1999. "Should We Fear Deflation?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 225-252.
    8. Allan Crawford, 1998. "Measurement biases in the Canadian CPI: An update," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 39-56.
    9. Orazio P. Attanasio & Luigi Guiso & Tullio Jappelli, 2002. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 317-351, April.
    10. Lawrence H. Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
    11. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
    12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    13. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April.
    14. Fujiki, Hiroshi & Okina, Kunio & Shiratsuka, Shigenori, 2001. "Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(1), pages 89-130, February.
    15. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    16. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    17. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    18. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
    19. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    20. Martin Feldstein, 1999. "Introduction to "Costs and Benefits of Price Stability, The"," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 1-8, National Bureau of Economic Research, Inc.
    21. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
    22. Hans-Werner Sinn, 1999. "Inflation and Welfare: Comment on Robert Lucas," NBER Working Papers 6979, National Bureau of Economic Research, Inc.
    23. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    24. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    25. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    26. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    27. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-631, August.
    28. Alastair Cunningham, 1996. "Measurement Bias in Price Indices: An Application to the UK's RPI," Bank of England working papers 47, Bank of England.
    29. Martin Feldstein, 1999. "The Costs and Benefits of Price Stability," NBER Books, National Bureau of Economic Research, Inc, number feld99-1, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kuroda, Sachiko & Yamamoto, Isamu, 2003. "The Impact of Downward Nominal Wage Rigidity on the Unemployment Rate: Quantitative Evidence from Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 57-85, December.
    2. Kuroda, Sachiko & Yamamoto, Isamu, 2003. "Are Japanese Nominal Wages Downwardly Rigid? (Part I): Examinations of Nominal Wage Change Distributions," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 1-29, August.
    3. Shigenori Shiratsuka, 2011. "A Macroprudential Perspective in Central Banking," IMES Discussion Paper Series 11-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Shin-Ichi Nishiyama, 2009. "Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting," Staff Working Papers 09-2, Bank of Canada.
    5. Tsutomu Watanabe & Tomoyoshi Yabu, 2019. "How Large is the Demand for Money at the ZLB? Evidence from Japan," Working Papers on Central Bank Communication 013, University of Tokyo, Graduate School of Economics.
    6. Helmut Wagner & Wolfram Berger, 2003. "Financial Globalization and Monetary Policy," DNB Staff Reports (discontinued) 95, Netherlands Central Bank.
    7. Fuchi, Hitoshi & Oda, Nobuyuki & Ugai, Hiroshi, 2008. "Optimal inflation for Japan's economy," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 439-475, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hitoshi Fuchi & Nobuyuki Oda & Hiroshi Ugai, 2007. "The Costs and Benefits of Inflation: Evaluation for Japan's Economy," Bank of Japan Working Paper Series 07-E-10, Bank of Japan.
    2. Fuchi, Hitoshi & Oda, Nobuyuki & Ugai, Hiroshi, 2008. "Optimal inflation for Japan's economy," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 439-475, December.
    3. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    4. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
    5. Gregor W. Smith, 2006. "The spectre of deflation: a review of empirical evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1041-1072, November.
    6. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105, Bank for International Settlements.
    7. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
    8. Hasan Bakhshi & Ben Martin & Tony Yates, 2002. "How uncertain are the welfare costs of inflation?," Bank of England working papers 152, Bank of England.
    9. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, vol. 90(May), pages 205-228.
    10. Simon Hall & Anthony Yates, 1998. "Are there downward nominal rigidities in product markets?," Bank of England working papers 80, Bank of England.
    11. Benchimol, Jonathan & Qureshi, Irfan, 2020. "Time-varying money demand and real balance effects," Economic Modelling, Elsevier, vol. 87(C), pages 197-211.
    12. Hasanov, Mübariz & Araç, Aysen & Telatar, Funda, 2010. "Nonlinearity and structural stability in the Phillips curve: Evidence from Turkey," Economic Modelling, Elsevier, vol. 27(5), pages 1103-1115, September.
    13. Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2014. "A New Approach to Construct Core Inflation," Working Papers 2014-091, Madras School of Economics,Chennai,India.
    14. L. Aucremanne, 2001. "The use of Robust Estimators as Measures of Core Inflation," DNB Staff Reports (discontinued) 61, Netherlands Central Bank.
    15. Döpke, Jörg & Pierdzioch, Christian, 2001. "Inflation and the Skewness of the Distribution of Relative Price Changes: Empirical Evidence for Germany," Kiel Working Papers 1059, Kiel Institute for the World Economy (IfW).
    16. Daniel Chiquiar & Raúl Ibarra-Ramírez, 2019. "Central Bank Independence and Inflation: An Empirical Analysis," Working Papers 2019-18, Banco de México.
    17. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    18. Kosack, Stephen, 2003. "Effective Aid: How Democracy Allows Development Aid to Improve the Quality of Life," World Development, Elsevier, vol. 31(1), pages 1-22, January.
    19. A. Nazif Çatik & Christopher Martin & A. Özlem Onder, 2011. "Relative price variability and the Phillips Curve: evidence from Turkey," Journal of Economic Studies, Emerald Group Publishing, vol. 38(5), pages 546-561, September.
    20. Folster, Stefan & Henrekson, Magnus, 1999. "Growth and the public sector: a critique of the critics," European Journal of Political Economy, Elsevier, vol. 15(2), pages 337-358, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:19:y:2001:i:2:p:49-83. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/imegvjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kinken (email available below). General contact details of provider: https://edirc.repec.org/data/imegvjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.