How Should Monetary Policy Be Conducted In An Era Of Price Stability?
The paper discusses several issues related to how monetary policy should be conducted in an era of price stability. Low inflation (with base drift in the price level) and price-level stability (without such base drift) are compared, and a suitable loss function (corresponding to flexible inflation targeting) is discussed, including the index and level for the inflation target. Three ways of maintaining price stability are examined, namely (1) a commitment to a simple instrument rule, (2) "forecast targeting," and (3) monetary targeting. Both (1) and (3) are found to be inferior to forecast targeting. The benefits of credibility (private inflation expectations coinciding with the inflation target) are discussed. Credibility improves the tradeoff between inflation variability, output-gap variability and instrument variability and makes it easier for the central bank to meet is inflation target. The threat of deflation and a liquidity trap is examined. Transparent inflation targeting and a contingency plan with emergency measures, including a coordinated fiscal and monetary expansion, are likely to avoid a liquidity trap, but also contribute to escaping from one if already trapped.
|Date of creation:||Dec 1999|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McCallum, Bennett T. & Nelson, Edward, 1999.
"Nominal income targeting in an open-economy optimizing model,"
Journal of Monetary Economics,
Elsevier, vol. 43(3), pages 553-578, June.
- McCallum, Bennett T. & Nelson, Edward, 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Seminar Papers 644, Stockholm University, Institute for International Economic Studies.
- McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
- Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
- Woodford, Michael, 1999.
"Optimal Monetary Policy Inertia,"
University of Manchester, vol. 67(0), pages 1-35, Supplemen.
- Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
- Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies.
- Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
- Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
- Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, vol. 63(1), pages 156-72, March.
- Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000.
"Optimal monetary policy with staggered wage and price contracts,"
Journal of Monetary Economics,
Elsevier, vol. 46(2), pages 281-313, October.
- Ryo Kato & Takayuki Tsuruga, 2002. "Matlab code for a sticky wage/price model," QM&RBC Codes 114, Quantitative Macroeconomics & Real Business Cycles.
- Tom Doan, . "RATS program to solve Erceg-Henderson-Levin model," Statistical Software Components RTZ00051, Boston College Department of Economics.
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
- Laubach, T. & Posen, A.S., 1997. "Disciplined Discretion: Monetary Targeting in Germany and Switzerland," Princeton Essays in International Economics 206, International Economics Section, Departement of Economics Princeton University,.
- Willem H. Buiter & Nikolaos Panigirtzoglou, 1999.
"Liquidity Traps: How to Avoid Them and How to Escape Them,"
NBER Working Papers
7245, National Bureau of Economic Research, Inc.
- Buiter, Willem H. & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers.
- Willem H Buiter & Nikolaos Panigirtzoglou, 2000. "Liquidity traps: how to avoid them and how to escape them," Bank of England working papers 111, Bank of England.
- Meltzer, Allan H, 1987. "Limits of Short-run Stabilization Policy: Presidential Address to the Western Economic Association, July 3, 1986," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 1-14, January.
- George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
- Bernanke, Ben S. & Mihov, Ilian, 1997.
"What does the Bundesbank target?,"
European Economic Review,
Elsevier, vol. 41(6), pages 1025-1053, June.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2342. 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: ()
If references are entirely missing, you can add them using this form.