Monetary and Economic Studies Vol.14, No.1 / July 1996

On Making Monetary Policy More Effective Domestically and Internationally

Allan H. Meltzer

Increased interest in price stability as the principal goal of monetary policy raises an issue about how well central banks can meet that goal.One approach is to forecast inflation a year or more ahead.Inability to separate permanent inflation from transitory,one-time changes in price levels suggests that forecast errors cannot be held within the 2% range frequently used.The paper again suggests an adaptive rule for money growth.If adopted for the principal currencies,the proposed rule would increase welfare for participants.Countries that have the best records of inflation control have often followed a rule of this kind.

Keywords: Price stability;Inflation;Monetary policy;Central banks;Credibility;Adaptive rules

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1996 Bank of Japan All Rights Reserved.

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