Inflation Targets: The Next Step for Monetary Policy

In September 1995, Senator Connie Mack (R-Fla.) introduced legislation that would require the Federal Reserve to provide a numerical definition of price stability, to set a timetable for achieving it, and to subordinate other monetary policy objectives to it. The merits of these provisions have been debated at length by economists and policymakers alike. Some believe that a monetary policy based on price stability must compromise economic growth, while others note that the differences between a price-level objective and an inflation target go way beyond semantics. I believe that the nation’s economic prosperity will be enhanced by a price-stability approach to monetary policy regardless of how the objective is defined.