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Price Stability: Is a Tough Central Bank Enough?

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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.

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.


Suggested citation: Christiano, Lawrence J., and Terry J. Fitzgerald, 2000. "Price Stability: Is a Tough Central Bank Enough?" Federal Reserve Bank of Cleveland, Economic Commentary, 08.01.2000.

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