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The Short-Run Dynamics of Long-Run Inflation Policy

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Currently, the Federal Reserve is being urged to adopt price stability or an explicit price-index target as its primary long-term monetary policy objective. The purpose of this paper is to ascertain the short- and long-term implications of an inflation policy for real output. Inflation policy is defined here in terms of a series of innovations that exclusively determine trend inflation. To estimate this series, the authors adopt a recently developed method that allows structural interpretation of a simple vector-autoregression and apply it to a macroeconomic system that includes real output and inflation. Results suggest that the benefits of a monetary policy aimed at achieving gradual disinflation would probably outweigh the costs.

Suggested citation: Carlson, John, William Gavin, and Katherine Samolyk. “The Short-Run Dynamics of Long-Run Inflation Policy,” Federal Reserve Bank of Cleveland, Economic Review, vol. 26, no. 3, pp. 26-35, 09.01.1990.

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