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Why a Rule for Stable Prices May Dominate a Rule for Zero Inflation

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There is a technical distinction between a zero-inflation rule and a price-level rule. The former allows bygones to be bygones; random shocks to the price level are allowed to accumulate over time. A price-level rule would require the Federal Reserve to offset these accumulated effects eventually. This paper shows that a rule for the price level may dominate a rule for the inflation rate, even in the case where, for purely economic reasons, an inflation rule is preferred. A price-level rule constrains the current behavior of policymakers because today's choices directly affect tomorrow's options.


Suggested citation: Gavin, William T., and Alan C. Stockman. “Why a Rule for Stable Prices May Dominate a Rule for Zero Inflation,” Federal Reserve Bank of Cleveland, Economic Review, vol. 27, no. 1, pp. 02-08, 03.01.1991.

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