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

  • Svensson, Lars E. O.

    ()

    (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 inflation-forecast targeting) and intermediate targeting (like money-growth targeting). A simple instrument rule does not provide a substitute for a systematic framework for 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 "risks to price stability"). By extending mean forecast targeting to distribution forecast targeting, nonlinearity, nonadditive uncertainty and model uncertainty can be incorporated. Eurosystem arguments in favor of its money-growth indicator and against inflation-forecast targeting are scrutinized and found unconvincing.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 91.

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Length: 50 pages
Date of creation: 01 Sep 1999
Date of revision:
Publication status: Published in The Monetary Transmission Process: Recent Developments and Lessons for Europe, Deutsche Bundesbank, (eds.), 2001, pages 60-102, Palgrave, New York.
Handle: RePEc:hhs:rbnkwp:0091
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Phone: 08 - 787 00 00
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Web page: http://www.riksbank.com/
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