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Vol. 78, No. 2
Posted 1996-03-01

The Costs and Benefits of Price Stability: An Assessment of Howitt's Rule


A common objection to making price stability the primary objective of monetary policy is that, once inflation is under way, it is less costly to live with a little inflation that it is to achieve a stable price level (as proposed in Howitt’s Rule). The author assesses the conditions that Howitt’s Rule requires and shows how reduced output growth caused by inflation might dramatically affect the outcome. He then compares the costs of achieving price stability with the benefits of stable prices, assuming inflation affects both the level and growth rate of output. The author also evaluates the level and growth rate of output and the cross-country and time-series evidence of inflation’s effects on economic growth.





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