Book contents
- Frontmatter
- Contents
- Preface
- Part I Introduction and main assumptions
- Part II The impact of monetary policy and inflation
- Part III The impact of monetary regimes
- 9 Centralised wage formation
- 10 Fiscal policy
- 11 Price stability goal
- 12 Uncertainty concerning policy formation
- 13 Policy uncertainty in a fixed-but-adjustable exchange rate regime
- 14 The impact of uncertainty on wage setting
- Part IV Policy implications
- Appendix: Microeconomic foundations
- Bibliography
- Index
11 - Price stability goal
Published online by Cambridge University Press: 22 September 2009
- Frontmatter
- Contents
- Preface
- Part I Introduction and main assumptions
- Part II The impact of monetary policy and inflation
- Part III The impact of monetary regimes
- 9 Centralised wage formation
- 10 Fiscal policy
- 11 Price stability goal
- 12 Uncertainty concerning policy formation
- 13 Policy uncertainty in a fixed-but-adjustable exchange rate regime
- 14 The impact of uncertainty on wage setting
- Part IV Policy implications
- Appendix: Microeconomic foundations
- Bibliography
- Index
Summary
Introduction
Monetary authorities have traditionally pursued a price stability goal. Economic theory recommends that the monetary authorities should pursue either a price stability goal or establish an inflation rate corresponding to full liquidity, that is, inflation equal to the negative of the marginal productivity of capital (Fischer and Modigliani, 1978; Friedman, 1969). A price stability goal can be explained by the consideration to minimise menu costs associated with price changes and costs associated with information collection. The full liquidity rule is explained by the consideration to increase the efficiency of money. Optimal inflation may be derived from a balance between these goals, see for example Turnovsky (1987b). The pursuit of a specific inflation rate makes it possible to avoid the wealth transfers between holders and issuers of fixed interest securities caused by unexpected inflation.
What is important for this analysis is that the authorities pursue a goal of a specific inflation rate. This implies that the authorities' preferences become asymmetric: for rates of inflation above the optimal rate, both employment and inflation goals are pursued while for inflation rates below the optimal rate a production goal exclusively is pursued. In the case where optimal inflation has been realised, the authorities are free to increase employment through monetary policy.
- Type
- Chapter
- Information
- Money and the Natural Rate of Unemployment , pp. 203 - 211Publisher: Cambridge University PressPrint publication year: 2000