Price Stability

7 Key excerpts on "Price Stability"

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  The Monetary Transmission Process

  Recent Developments and Lessons for Europe

  • D. Bundesbank(Author)
  • 2001(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The chapter addresses three blocks of issues related, respectively, to the de®nition of Price Stability, the maintenance of Price Stability and the lessons to be drawn for the Eurosystem. Although I shall say something on each of these issues, my comments will focus mainly on the second issue, which I consider to be the most important part of the chapter. On the de®nition of Price Stability, I believe that the main question addressed by the author is whether Price Stability should be understood as constancy of the price level or as a suf®ciently low rate of in¯ation. From a conceptual viewpoint, the debate is far from settled, and it is presented as such in the chapter. Still, I think it is interesting to consider Svensson's idea that constancy of the price level may not only be preferable on long-term grounds ± since it leads to a lower variance of the price level ± but, under certain circumstances, also on short-term grounds. In particular, in those cases where there is a serious risk of de¯ation or when de¯ation actually occurs, having a constant price-level objective would be preferable to having a low in¯ation objective as long as it is credible before the eyes of the public. This would make in¯ationary expectations higher, as a result of the expected return of the price level to its initial value, and real interest rates considerably lower. More generally, however, as the author himself recognises, the issue of whether a constant price level or a suf®ciently low rate of in¯ation is a preferable de®nition of Price Stability is far from being conceptually settled. For this reason, he resorts to a pragmatic solution to my liking: for the time being, achieving and maintaining low in¯ation is a suf®ciently ambitious objective for Price Stability. This is, moreover, the solution chosen by the Eurosystem and other central banks.

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  Monetary Stability in Europe

  • Stefan Collignon(Author)
  • 2003(Publication Date)
  • Taylor & Francis

    (Publisher)

  7Sustaining price Price Stability

  In the last two chapters we have emphasised the importance of authorities’ relative preference for output and Price Stability reflected in the policy coefficient A. Knowing the relative importance given to these policy objectives is crucial to the assessment of net benefits which derive from belonging to the monetary union to its members. In this chapter we will look at the commitment to Price Stability by European authorities from different angles in order to get a clearer view of the relative weight given to these policy objectives. We will first look at the concept of Price Stability then at possible inflationary biases in monetary policy objectives and finally, at the European policy frame.

  Defining Price Stability as a policy objective

  Maintaining Price Stability is the primary objective of European Monetary Union (EMU) (Treaty of European Union (TEU) arts. 2, 3a, 105 and Protocol on the Statute of the European System of Central Banks (ESCB) and European Central Bank (ECB)). No doubt this reflects the political consensus that has emerged in Europe around the German model. In the academic field, convictions about the benefits are less unanimous. It is often said we lack an account of the cost of inflation that matches the intensity with which inflation is denounced by policy makers and disliked by the general public (Fischer 1994).

  In the 1950–70s orthodox economic theory was built on the Phillips curve tradeoff between inflation and output. But after the Great Inflation, these models lost their attraction. As Lucas (1976) put it:

  The inference that permanent inflation will therefore induce a permanent economic high is no doubt (…) an cient, yet it is only recently that this notion has undergone the mysterious transformation from obvious fallacy to the comerstone of the theory of economic policy.

  Friedman replaced the simple Phillips curve with the Natural Rate Hypothesis (1968). This eliminated the inflation/output trade-off in the long run but still kept it in the short term. Ultimately, even this was put into question by neoclassical economists who claimed that systematic monetary policy will affect only nominal magnitudes and not real variables like output and employment, even in the short run (Lucas 1972; Sargent 1973; Barro 1976). If the real world is effectively independent from nominal variables, it is not obvious why inflation would represent a cost. Theory has moved from positive to zero benefit from inflation. In the first chapter we have argued that stable money matters in the long run because it sustains the fundamental norms of a market economy. In this chapter we will focus on the short-run policy preferences for output versus inflation stabilisation.

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  Paper Money Collapse

  The Folly of Elastic Money

  • Detlev S. Schlichter(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Part Three Fallacies about the Price Level and Price-Level Stabilization Passage contains an image

  Chapter 5 Common Misconceptions Regarding the Price Level

  The main reason why the phenomena analyzed in the previous chapters, although powerful and for a long time the intense focus of theoretical investigation, are not at the forefront of present monetary policy discussions is that it is widely believed today that money that is broadly price-level stable, meaning, whose purchasing power as measured by some price index does not decline too rapidly or is not otherwise too volatile, is also “neutral” money, that is, this money should have no distorting or disruptive influences on the real economy. It would not be an exaggeration to say that a reasonably stable price level has become the accepted definition of good money, and that, as long as the central bank delivers an acceptable degree of price-level stability, it must have done a good job. Price level here means any of the broad-based statistical averages of prices in the economy that are considered reasonable representations of money’s purchasing power, such as, most important, the consumer price index, and sometimes the producer price index and potentially others. In today’s debate, a reasonably stable price index has become shorthand for monetary stability. This is not a new idea but has been deeply engrained in neoclassical economics. In his 1931 book Prices and Production, which provides an excellent exposition of the Austrian Business Cycle Theory, Hayek quotes Cambridge economist Arthur C. Pigou as saying that “if countries with paper currencies will regulate them with a view to keeping the general price level in some sense stable, there will be no impulses from the side of money which can properly be called ‘autonomous.’ ”1

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  Designing Central Banks

  • Heinz Herrmann, David Mayes, Geoffrey E Wood(Authors)
  • 2009(Publication Date)
  • Routledge

    (Publisher)

  Ideally, Price Stability should be defined in terms of the price index that best captures the cost of inflation to society. The cost of living index is a welfare- based measure but it could conceivably be too narrow for monetary policy purposes. The proposed approach of Reis and Watson (2007) deserves further examination. But even within the cost of living framework, there will be significant challenges going forward. The accurate measurement of service prices will grow in importance, as will the need to figure out how best to deal with the costs of owner-occupied housing. 31 The proper treatment of the gains from the arrival in the marketplace of new goods, whether domestically produced or imported, will continue to pose challenges. And these challenges have to be addressed. Defining Price Stability at a positive measured rate of inflation is costly to society if measurement error is not as significant as some believe. I have argued that it is inappropriate for central banks to target measures of core inflation for a variety of reasons. However, the modern theory of monetary policy suggests that central banks should target sticky price inflation, which some have interpreted as being the same as core inflation. Above I presented some preliminary estimates of sticky price inflation using the data on the frequency of price changes in Bils and Klenow (2004) and Dhyne et al. (2005). For the United States at least, there seem to be some notable differences between sticky price inflation, at least as I calculated it, and a more traditional measure of core inflation. There is clearly scope for further exploration of the concept of sticky price inflation. My simple estimates only used data on the frequency of price changes

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  Banking on the Future

  The Fall and Rise of Central Banking

  • Howard Davies, David W. Green(Authors)
  • 2010(Publication Date)
  • Princeton University Press

    (Publisher)

  No central bank targets very-short-term inflation, with most looking at one or two years ahead or, in the case of Australia, inflation “through the cycle.” This has a bearing on which prices should not be taken into account so that erratic prices that should not affect future inflation, such as food prices, are often excluded. One possible, indeed obvious, interpretation of the concept of Price Stability could be stability in the price level itself. In practice, a rate of inflation is almost invariably the target, the reason being that aiming at a price level, even one that changed over time, could be difficult to explain. Unlike when using inflation targets, bygones would not be bygones and a period of undershooting would need to be followed by a period of 33 C H A P T E R T W O overshooting, and vice versa. What this would mean is that the near-term target would need to vary according to recent inflation performance and the time horizon chosen for offsetting any overshooting or undershoot-ing. Downward price adjustments could prove costly in output terms. The whole process could be complex and confusing, and would conse-quently be damaging to credibility. Price Stability is therefore usually taken to mean stability in the rate of inflation. When an inflation target is announced, there is also usually some state-ment to the effect that control of inflation is the “primary” or “over-riding” goal of monetary policy and that the central bank will be held responsible for meeting the inflation target. Sometimes there is no men-tion of competing goals, as was the case in the Reserve Bank of New Zealand Act in 1989. More often there is reference to subordinate goals, usually relating to growth or employment, or even in general terms to the wider economic objectives of government. In principle, the infla-tion target is supposed to take precedence in the event of conflict.

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  Financial Stability Without Central Banks

  • George Selgin, Kevin Dowd, Mathieu Bédard(Authors)
  • 2018(Publication Date)
  • London Publishing Partnership

    (Publisher)

  Throw in the subprime crisis, and the Fed’s record becomes still worse. In short, anyone who claims that the Fed’s establishment resulted in a definite if delayed reduction in US financial instability is guilty of ignoring what the record actually shows.

  Price Stability

  What about Price Stability? Would a free banking system automatically achieve it? Not quite. Nor should we want it to! I struggled with the title assigned to my talk because in my view a stable price level or inflation rate is neither desirable nor necessary for overall monetary and macroeconomic stability.

  The simple reason for that is that the general level of prices can rise or fall for more than one reason and it is very important to distinguish these different reasons.

  When central bankers talk about deflation today, they have a tendency to assume that the only way deflation can happen is because spending is collapsing. And of course, if spending is collapsing then that is unfortunate. The decline in prices that happens is itself actually not what is bad. What is bad is the fact that people are spending less and this is not only reflected in falling prices but, more seriously, reflected in declines in output. With less output, you also have less employment.

  This is what typically happens in downturns, such as the downturns of 2008–9 or 1936–38 or 1930–33. By the way, in every one of these episodes I have just mentioned, Federal Reserve misconduct played a crucial role.

  But in any event, in these episodes of deflation, which are usually relatively short term, demand collapses and therefore there is less spending to purchase goods. As fewer goods are being demanded, less labour will be demanded as well, so unemployment ensues.

  But, prices can also fall because there is more output of goods as a result of supply improving, rather than demand suffering a setback. That is quite a different sort of deflation. Here we have more goods being produced at cheaper costs, prices fall to reflect falling costs, but quantities are growing. That is, the quantity demanded and supplied is going up.

  Most deflation throughout history, until the twentieth century, was this good sort of deflation. For example, in both the UK and the US, between 1873 and 1896 or so, we had a long stretch of deflation at a mild annual rate of something like 2 per cent.

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  Money, Credit and Price Stability

  • Paul Dalziel(Author)
  • 2000(Publication Date)
  • Taylor & Francis

    (Publisher)

  1    The quest for Price Stability

  One of the oldest ideas in economics is the quantity theory of money; indeed, The New Palgrave describes the proposition that increases in the stock of money eventually cause prices to rise in the same proportion as being ‘older than economic theory itself’ (Bridel, 1989, p. 298). With suitable extensions to recognise the impact of changes in the volume of economic transactions or the velocity of circulation (Fisher, 1911), and more generally the impact of changes in real money demand (Friedman, 1956), this long-standing theory remains the starting point for much modern analysis in monetary economics. In particular, its strong causal link between changes in the money supply and changes in the price level offers a clear strategy for achieving Price Stability: those responsible for controlling the money supply should be given a statutory duty to implement policy that is consistent with a pre-announced low inflation target. New Zealand was the first country to reform its central bank legislation along these lines (in 1989), and its example has been followed by others since (including Canada in 1991, the United Kingdom in 1997 and the European Central Bank in 1998). The result has been a clear improvement in inflation performance by the end of the twentieth century compared with the previous three decades (see Figure 1.1 ).

  Despite the success of the new monetary framework in controlling inflation, there remains a puzzle that this book seeks to address. To be effective for policy purposes, the quantity theory of money requires that the central bank has the ability to determine the nominal money supply exogenously (that is independently of other economic influences) so that its growth can be set to be consistent with the bank’s inflation target. In practice, however, monetary authorities do not have direct control over the monetary aggregates, and indeed the English-language central banks that attempted to target money supply growth rates in the 1970s abandoned that practice in the 1980s. The difficulty is that virtually all money in modern economies takes the form of bank deposits that are created, not by the monetary authorities, but by the credit extension activities of private sector banks. Consequently central banks are able to influence the volume of this credit-money only indirectly, particularly through policy-induced changes in the banking system’s base interest rate. Analysing the critical roles of credit in determining money supply growth and as a key component of the transmission mechanism from monetary policy to Price Stability is the primary subject of this book and provides its title, Money, Credit and Price Stability

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