Seminar Papers, Institute for International Economic Studies, Stockholm University
Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability
Abstract: 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.
Keywords: Inflation targeting; intermediate targeting; monetary targeting; Eurosystem; (follow links to similar papers)
JEL-Codes: E42; E52; E58; (follow links to similar papers)
56 pages, June 1, 1999
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