NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Should Monetary Policy be Conducted in an Era of Price Stability?

Lars E.O. Svensson

NBER Working Paper No. 7516
Issued in February 2000
NBER Program(s):   PE

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 in maintaining price stability. 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 its 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.

download in pdf format
   (410 K)

email paper

This paper is available as PDF (410 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7516

Published: Lars E.O. Svensson, 1999. "How should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 195-259.

Users who downloaded this paper also downloaded these:
Svensson w7276 Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability
Bordo, Landon-Lane, and Redish w10329 Good versus Bad Deflation: Lessons from the Gold Standard Era
Svensson w7957 The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap
Mishkin w9291 The Role of Output Stabilization in the Conduct of Monetary Policy
Bernanke and Mishkin w5893 Inflation Targeting: A New Framework for Monetary Policy?
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us