How Should Monetary Policy Be Conducted In An Era Of Price Stability?

Lars Svensson

No 2342, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Credibility; Deflation; Inflation Target; Liquidity Trap; Price-Level Targeting (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 1999-12
References: Add references at CitEc
Citations: View citations in EconPapers (102)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2342 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: How Should Monetary Policy be Conducted in an Era of Price Stability? (2000)
Journal Article: How should monetary policy be conducted in an era of price stability? (1999)
Working Paper: How Should Monetary Policy Be Conducted in an Era of Price Stability (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2342

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=2342

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().