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Price stability: Is a tough central bank enough?

By Fitzgerald, Terry J
Publication: Federal Reserve Bank of Cleveland. Economic Commentary
Date: Tuesday, August 1 2000

HEADNOTE

How can price stability be achieved? Conventional wisdom says that a tough, independent central bank is all that is necessary. However, a new view-known as the fiscal theory of the price level-argues that an appropriate fiscal

policy is also required, no matter how tough the central bank may be. Whether one accepts the conventional or the fiscal theory view has significant implications for the way central banks should do business.

The objective of monetary policy, laid out in the Federal Reserve Act, is to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Many believe the Federal Reserve's primary focus should be achieving stable prices, arguing that price stability is essential to attaining the companion goals of maximum employment and moderate interest rates.

How can price stability be achieved? Conventional wisdom offers a simple and straightforward answer: Make sure there is a tough, independent central bank with an unwavering commitment to price stability. According to this view, a tough central bank is all that is required.

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