TY  - JOUR
AU  - Woodford,Michael
TI  - Inflation Stabilization and Welfare
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8071
PY  - 2001
Y2  - January 2001
UR  - http://www.nber.org/papers/w8071
L1  - http://www.nber.org/papers/w8071.pdf
N1  - Author contact info:
Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
AB  - This paper derives loss functions for monetary policy that are grounded in the welfare of private agents, for optimizing models with nominal price rigidities. Inflation stabilization enhances welfare, insofar as variable inflation results in real distortions when prices are not adjusted throughout the economy in a perfectly synchronized fashion.  The exact sense in which inflation variability matters for welfare, however, depends upon the details of price-setting behavior. Conditions are described under which optimal policy involves complete stabilization of the price level. This may be optimal even in the presence of 'supply shocks' of several possible sorts, and even in the presence of distortions that imply that the optimal output gap is positive (despite existence of a long-run Phillips curve).  At the same time discussed why complete price-level stabilization is not optimal in more complicated (and probably more realistic) settings.
ER  -