Monetary Policy and Price Stability

40 Pages Posted: 6 Nov 2000

See all articles by Karen Johnson

Karen Johnson

Government of the United States of America - Division of International Finance (IFDP)

David H. Small

Federal Reserve Board - Monetary Studies Section

Ralph W. Tryon

Government of the United States of America - Division of International Finance (IFDP)

Date Written: July 1999

Abstract

This paper explores issues that arise in implementing monetary policy under conditions of sustained price stability. We discuss several issues that concern the selection of a central bank's inflation objective: price measurement questions must be recognized in articulating the goals of monetary policy under sustained low inflation, questions about the behavior of other key nominal variables, particularly wages, when price increases are on average about zero, and the possibility of other channels through which conditions of very low inflation change relationships within the real economy. We present a framework for analyzing monetary policy reaction functions that can illuminate the choices facing policy makers in a regime of price stability. The zero lower bound on nominal interest rates is a potential constraint on monetary policy when nominal interest rates are low on average, which will tend to be the case when long-term inflation is low. We summarize the results of research done at the Federal Reserve to clarify these issues for the United States and consider the availability and effectiveness of alternative policy tools when the nominal interest rate is at the zero bound.

Keywords: inflation, interest rate policy, zero lower bound, Taylor rules

JEL Classification: E31, E52

Suggested Citation

Johnson, Karen H. and Small, David H. and Tryon, Ralph, Monetary Policy and Price Stability (July 1999). International Finance Working Paper No. 641. Available at SSRN: https://ssrn.com/abstract=231788 or http://dx.doi.org/10.2139/ssrn.231788

Karen H. Johnson (Contact Author)

Government of the United States of America - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2345 (Phone)
202-452-6424 (Fax)

David H. Small

Federal Reserve Board - Monetary Studies Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Ralph Tryon

Government of the United States of America - Division of International Finance (IFDP) ( email )

Stop 24
Washington, DC 20551
United States
202-452-2368 (Phone)
202-736-5638 (Fax)

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