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Controlling inflation after Bretton Woods: an analysis based on policy objectives

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  • William T. Gavin

Abstract

This paper reviews the inflation experience in the post-Bretton Woods era in the context of alternative central bankobjectives. It summarizes research on inflation-targeting issues, especially those associated with stabilizing the price level. Generally, inflation-targeting schemes do not provide a nominal anchor unless the central bank is focusing strictly on theinflation target and ignoring unemployment and the business cycle. Research summarized in this article suggests that themost important step a central bank can take to improve policy is to decide on a long-term path for the price level. Being explicit about the desired path for the price level not only reduces inflation variability at all horizons, but also gives the policymaker more flexibility to pursue output stabilization goals.

Suggested Citation

  • William T. Gavin, 2000. "Controlling inflation after Bretton Woods: an analysis based on policy objectives," Working Papers 2000-007, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2000-007
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    References listed on IDEAS

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    1. Lars E. O. Svensson, 1996. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," NBER Working Papers 5719, National Bureau of Economic Research, Inc.
    2. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, pages 98-114.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, pages 1661-1707.
    4. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, pages 1057-1072.
    6. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
    7. Richard H. Clarida & Mark Gertler, 1997. "How the Bundesbank Conducts Monetary Policy," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 363-412 National Bureau of Economic Research, Inc.
    8. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-984, November.
    9. Stephen G. Cecchetti & Margaret M. McConnell & Gabriel Perez Quiros, 1999. "Policymakers' revealed preferences and the output-inflation variability trade-off: implications for the European system of central banks," Proceedings, Federal Reserve Bank of San Francisco.
    10. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, pages 1267-1286.
    11. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30.
    12. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
    13. Cecchetti, Stephen G & McConnell, Margaret M & Perez-Quiros, Gabriel, 2002. "Policymakers' Revealed Preferences and the Output-Inflation Variability Trade-Off: Implications for the European System of Central Banks," Manchester School, University of Manchester, vol. 70(4), pages 596-618, Special I.
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    Keywords

    Inflation (Finance) ; Monetary policy;

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