|Fed Gov. Mishkin: Stabilizing Inflation, Economic Growth Mutually Reinforcing
Research in monetary economics has described so-called dual goals—stabilizing inflation and economic activity—to support the public good. These goals might appear to conflict, but research demonstrates that those two objectives often reinforce one another, Federal Reserve Board Governor Frederic S. Mishkin said in a speech in late February.
Low inflation promotes stable growth
"Both economic theory and empirical evidence indicate that the stabilization of inflation promotes stronger economic activity in the long run," Mishkin said.
Two principles support that conclusion. One, low inflation benefits economic welfare, he explained. High inflation can damage economic efficiency in numerous ways, including distorting savings and investment decisions, Mishkin said. "Rates of inflation above the low levels of recent years can have serious adverse effects on economic efficiency and hence on output in the long run," he said.
The second principle is the lack of a long-run tradeoff between unemployment and the inflation rate. "The long-run Phillips curve is vertical, implying that the economy gravitates to some natural rate of unemployment in the long run no matter what the rate of inflation is," Mishkin said.
He added that some structural features of the economy are beyond the control of monetary policy. "The natural [unemployment] rate, in turn, is determined by the structure of labor and product markets, including elements such as the ease with which people who lose their jobs can find new employment and the pace at which technological progress creates new industries and occupations while shrinking or eliminating others," he said.
He also stressed that monetary policy makers should focus their efforts on stabilizing core inflation, which excludes the more volatile and seasonal food and energy prices, because that leads to better economic outcomes such as lower unemployment. "Research has emphasized the interaction between stabilizing inflation and economic activity and has found that price stability can contribute to overall economic stability in a range of circumstances," Mishkin said.
Keeping inflation in mind is key
March 12, 2008