Monetary Policy and Price Stability - February 1, 1989 - A proposal for zero inflation

Sep 21, 2026

Uploaded by Asher

Monetary Policy and Price Stability argues for a credible information-based approach to achieving long-run price-level stability, emphasizing that households and firms form decisions based on expectations of future policy. It explains why the Federal Reserve’s short-term influence weakens over time and links inflation to impaired purchasing power and reduced economic efficiency. The text proposes clear public goals, methods, and timetables—ultimately zero inflation—to reduce informational noise, distortions, and inefficient resource deployment.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Monetary Policy and Price Stability

Price stability, information, and inflation

by W.Lee Hoskins In the las decade,conomic rescarchabout information—what people know,how they learn it,and how they react—has caused a revolution in how econo-mists analyze macroeconomic policies. Economists recognize that households,businesses,and government agenciesinvest considerable amounts of timeand other resources monitoring eco-nomic policy and that they base privatedecisions on what they expect to hap-pen.They then strive to make them-selves as well-off as possible if their ex-pectations are realized.For example,ifpeople expect their tax liabilities to risein the future because of large budgetdeficits today,they have an incentiveto shelter their future income fromtaxes by altering their pattern of spend-ing and investment.Consequently,taxrevenues may be even lower in the fu-ture than the government expected. Contemporary thinking about marketexpectations recognizes that marketsoften make mistakes about whatpolicies the government will pursue.But people work hard to form correctand unbiased opinions about futureevents,including govenment policiesIf people are correct on average aboutfuture policies,then governmentpolicymakers should not count onbeing able to persuade or influence thepublic for long periods of time.For ex-ample,if federal deficits rise everyyear despite announced plans to reducethem,future announcements will be Monetary Policy,Information,and Price Stability discounted and eventually ignored.Policymakers need to reconsider theirown roles in our economic system inlight of these views about information. # ■ Monetary Policy and PriceStability Our society has established many goalsfor economic performance,includinglow rates of unemployment and pover-ty,more balanced federal budget andtrade positions,and price stability.Re-sponsibilities for accomplishing thesegoals are assigned to various govern-mental agencies,and the actions ofsome policymakers can clearly affectthe operating environment faced byothers. The Federal Reserve System seeks tomaximize our nation's production andemployment by maintaining price sta-bility over time.Over short intervals,the Federal Reserve can strongly in-fluence production and employment,but its long-term influence is weak ornonexistent.Growth of output,employ-ment,and wealth in the long run surelydepends on a nation's resourcefulnessin utilizing land,labor,and capital.TheFederal Reserve's monetary policy canbest promote an efficient economic sys-tem by establishing a stable price-levelenvironment.This environment en-courages decisionmakers—private andpublic—to make long-term plans andcontracts without concern that future in-flation will later penalize them. February 1,1989 Inflation rates over the last severalyears have eroded the purchasingpower of the dollar and have im-paired economic efficiency.TheFederal Reserve could move more ef-fectively toward its stated goal ofprice stability through an informa-tion program stating its goals,methods,and timetables for achiev-ing zero inflation. I am especially interested in how theFederal Reserve could enhance ournation's economic efficiency by provid-ing and disseminating monetary policyinformation in a different way.Our in-flation rate has hovered around 4 per-cent for about half a dozen years;thisyear,the rate could easily exceed 5 per-cent.Some people recall that inflationrates were about twice that amountonly eight yearsago,and regard 4 to 5percent as an acceptable standard forsuccess.But a 4 to 5 percent inflationrate means that the overall price levelincreased by 30 percent during the lastsix years,severely diminishing the pur-chasing power of the dollar.I am deep-ly disappointed by this performance.Continuing inflation rates of this mag-nitude do not seem today to be re-garded as a pressing economic prob-lem,yet cumulatively they have erodedthe value ofour dollars and have im-paired our economic efficiency. Isuggest that we as a nation embracethe goal of price-level stability andbegin immediately to att

FAQs

How do expectations shape economic decisions in the text?

Households, businesses, and government agencies monitor economic policy and base private decisions on what they expect to happen. They also adjust spending and investment to protect themselves if future tax liabilities or policies are anticipated to change.

What role does the Federal Reserve play, according to the document?

The Federal Reserve seeks to maximize production and employment by maintaining price stability over time. Its long-term influence is described as weak or nonexistent over short intervals, but a stable price-level environment is presented as the key to supporting long-term planning.

Why does the document argue for eliminating inflation rather than tolerating a positive rate?

Any positive inflation rate is portrayed as arbitrary and potentially viewed as a trade-off by the public. The text also claims inflation obscures market information, adds noise to prices, distorts decisions, and interacts negatively with the tax system, reducing resource deployment efficiency.

Sep 21, 2026

Uploaded by Asher