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

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  • Shiratsuka, Shigenori

    (Institute for Monetary & Econ 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, gmeasured price stability h and gsustainable price stability. h I argue that g sustainable price stability h should be the fundamental goal for monetary policy. Although, from the viewpoint of accountability, gmeasured price stability h 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 stability h seems to be maintained, a central bank may need to alter interest rates promptly if it judges that the maintenance of gsustainable price stability h 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 stability h 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 discretion h 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
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Helmut Wagner & Wolfram Berger, 2003. "Financial Globalization and Monetary Policy," DNB Staff Reports (discontinued) 95, Netherlands Central Bank.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Shin-Ichi Nishiyama, 2009. "Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting," Staff Working Papers 09-2, Bank of Canada.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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