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Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability

  • Svensson, Lars

    ()

    (Institute for International Economic Studies, Stockholm University)

This paper discusses how price stability can be defined and how price stability can be maintained in practice. Some lessons for the Eurosystem are also considered. With regard to defining price stability, the choice between price-level stability and low (including zero) inflation and the decisions about the price index, the quantitative target and the role of output stabilization are examined. With regard to maintaining price stability, three main alternatives are considered, namely a commitment to a simple instrument rule (like a Taylor rule), forecast targeting (like inflaiton-forecast targeting) and intermediate targeting (like money-growth targeting). A simple instrument rule does not provide an substitute for a systematic framework of monetary policy decisions. Such a framework is instead provided by forecast targeting. Forecast targeting can incorporate judgemental adjustments, extra-model information, and different indicators (including indicators of "risk to price stability"). By extending mean forecast targeting to distribution forecast targeting, nonlinearity, nonadditive uncertainty and model uncertainty can be incorporated. Eurosystem arguments in favour of its money-growth indicator and against inflation-forecast targeting are scrutinized and found unconvincing.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 673.

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Length: 56 pages
Date of creation: 01 Jun 1999
Date of revision:
Handle: RePEc:hhs:iiessp:0673
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Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden

Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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