What horizon for price stability

Frank Smets

No 24, Working Paper Series from European Central Bank

Abstract: This paper analyses in a unified framework the twin issues of the appropriate horizon for achieving price stability in the face of unexpected disturbances and the choice of a price level versus an inflation objective. Using a small estimated forward-looking model of the euro area economy, the three main findings are: 1) The policy horizon becomes shorter the greater the weight on price stability in society's objective function, the higher the degree of 'forward-lookingness' in the economy and the greater the slope of the Phillips curve; 2) The optimal policy horizon for a price level objective is generally greater than that for an inflation objective; 3) Even if society cares about inflation stabilisation (rather than the stabilisation of the price level), it often pays to give the central bank a price level objective (rather than an inflation objective), provided the horizon is optimally chosen to be somewhat longer and there is a small weight on interest rate stabilisation in the loss function. This result depends, however, on the structure of the economy. JEL Classification: E4, E5

Keywords: euro area; monetary policy; policy rules; strategy (search for similar items in EconPapers)
Date: 2000-07
Note: 58657
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (95)

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