Mishkin_Monetrary+Policy+Strategy

Mishkin_Monetrary+Policy+Strategy - NBER WORKING PAPER...

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Unformatted text preview: NBER WORKING PAPER SERIES MONETARY POLICY STRATEGY: HOW DID WE GET HERE? Frederic S. Mishkin Working Paper 12515 http://www.nber.org/papers/w12515 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2006 This paper is the introductory chapter in my book, Monetary Policy Strategy , forthcoming from MIT Press. I thank my editor Elizabeth Murry for her extremely helpful comments. Any views expressed in this paper are those of the author only and not those of Columbia University or the National Bureau of Economic Research. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. 2006 by Frederic S. Mishkin. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source. Monetary Policy Strategy: How Did We Get Here? Frederic S. Mishkin NBER Working Paper No. 12515 September 2006 JEL No. E52, E58 ABSTRACT This paper, which is the introductory chapter in my book, Monetary Policy Strategy , forthcoming from MIT Press, outlines how thinking in academia and central banks about monetary policy strategy has evolved over time. It shows that six ideas that are now accepted by monetary authorities and governments in almost all countries of the world have led to improved monetary performance: 1) there is no long-run tradeoff between output (employment) and inflation; 2) expectations are critical to monetary policy outcomes; 3) inflation has high costs; 4) monetary policy is subject to the time-inconsistency problem; 5) central bank independence helps improve the efficacy of monetary policy; and 6) a strong nominal anchor is the key to producing good monetary policy outcomes. Frederic S. Mishkin Uris Hall 817 Graduate School of Business Columbia University New York, NY 10027 and NBER fsm3@columbia.edu-1- The last three decades have seen an extraordinary transformation in the conduct of monetary policy. In the 1970s, inflation had risen to very high levels, with most countries, , including the United States, experiencing inflation rates in the double digits. Today, almost all nations in the world are in a low inflation environment. Of two hundred and twenty-three countries, one hundred and ninety-three currently have annual inflation rates less than or equal to 10%, while one hundred and forty-nine have annual inflation rates less than or equal to 5%. 1 Why and how has the strategy of the conduct of monetary policy changed such that it has become so successful in taming inflation? The answer provided in the following chapters is that monetary authorities and governments in almost all countries of the world have come to accept the following ideas: 1) there is no long-run tradeoff between output (employment) and inflation; 2) expectations are critical to monetary policy outcomes; 3) inflation has high costs; 4) monetary policy is...
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Mishkin_Monetrary+Policy+Strategy - NBER WORKING PAPER...

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