Abstract
Since the 1980s there has been a growing consensus worldwide on the importance of price stability as the overriding long-term objective for monetary policy. This consensus stems in part from the fact that monetary policy can produce effects in the real economy only in the short run. Expansionary monetary policy may lead to higher levels of employment and economic activity, but only until businesses and workers start to react, adjusting their price and wage expectations accordingly. Thereafter the only result is higher inflation, with no output gains. More recently, empirical evidence has shown a negative correlation between high inflation and economic growth, suggesting that the best goal for monetary policy is to promote price stability.
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