A Conference on Price Stability

The Federal Reserve Bank of Cleveland has publicly endorsed a legislative resolution that would make zero inflation, or price-level stability, the overriding long-run objective of the Federal Reserve System. Price-level stability means a policy intended to keep the price level reasonably constant over long horizons. That is, although the price level may fluctuate temporarily in response to transitory real output and money demand shocks, permanent shifts in money demand and in real output would be offset in order to ensure that the long-run price level is stationary. The term zero inflation is commonly used as a synonym for price-level stability. Care must be taken to distinguish this usage from a monetary growth rule that would result in zero expected inflation in the long run, but that could cause wide deviations of the price level from a constant trend as the income velocity of money shifts. Price-level stability should also be distinguished from a zero-inflation target in which the central bank tries to achieve zero inflation in every month or quarter. Such a strategy allows target misses to accumulate, which in turn allows the price level to follow a random walk. In principle, a price-level rule would not preclude temporary policies to stabilize the business cycle. In practice, such a rule would remove uncertainty about the long-run price level and would be, in our judgment, the best policy to ensure sustained economic growth. Admittedly, economists have not offered much formal analysis in support of this issue. Policymakers, however, are often required to make choices regardless of whether academic debates have been fully resolved. In order to advance the research about the role of inflation in the design of monetary policy, the Federal Reserve Bank of Cleveland sponsored a Conference on Price Stability in November 1990. The full proceedings of the conference appear in the August 1991 issue oi the Journal of Money, Credit, and Banking} In particular, we asked the participating economists to explain what recent developments in macroeconomic research have taught us about the optimal inflation policy. The most widely cited origin of the optimal inflation literature is a 1969 article by Milton