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

  • Shiratsuka, Shigenori

    (Institute for Monetary & Econ Studies, Bank of Japan)

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, gmeasured price stabilityh and gsustainable price stability.h I argue that g sustainable price stabilityh should be the fundamental goal for monetary policy. Although, from the viewpoint of accountability, gmeasured price stabilityh 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 gsustainable price stability.h 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 gmeasured price stabilityh seems to be maintained, a central bank may need to alter interest rates promptly if it judges that the maintenance of gsustainable price stabilityh 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 g measured price stabilityh and gsustainable price stability.h The current policy framework adopted by the Bank of Japan can be viewed as aiming at a kind of gconstrained discretionh by restricting pure discretion under open independence in line with this direction.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 19 (2001)
Issue (Month): 2 (May)
Pages: 49-83

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Handle: RePEc:ime:imemes:v:19:y:2001:i:2:p:49-83
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  17. 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.
  18. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
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