Monetary and Economic Studies Vol.19, No. S-1 / February 2001

"The Role of Monetary Policy under Low Inflation: Deflationary Shocks and Policy Responses," Keynote Speeches, Low Inflation, Deflation, and Policies for Future Price Stability

John B. Taylor

The effects of three different inflationary environments-high inflation, low inflation, and negative inflation-on real output stability are examined by looking at the experiences of Japan and the United States during the last 30 years. I begin by going back to see how things looked from the vantage point of the 1987 international conference at the Bank of Japan. Next I trace out how economic performance has evolved since then. Economic performance appears to have been better with low inflation than with either high inflation or negative inflation. I also look at some of the reasons for the different inflationary environments. I take both an interest rate policy rule approach and a quantity theory of money approach. Both approaches suggest that monetary policy has been the key factor in generating the different inflationary experiences.

Keywords: Monetary policy; Inflation; Policy rule; Money growth; Zero interest rate policy

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 © 2001 Bank of Japan All Rights Reserved.

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