The algebra of price stability

Abstract

In this paper, we propose two definitions of price stability that encompass the interpretations of price stability found in the economic literature. To determine the conditions under which monetary policy can achieve price stability, we examine several well-known classes of monetary rules including the targeting of monetary aggregates, nominal GNP, prices, and interest rates. In addition, we use a linear rational expectations model to explore the degree to which price stability constrains short-term stabilization policy. We find that price stability does not necessarily prevent the monetary authority from pursuing short-term stabilization goals.