This article is a reprint of a speech given by William Poole, president of the Federal Reserve Bank of St. Louis, to the St. Louis Gateway Chapter of the National Association for Business Economics. In today’s environment, economic uncertainties abound both abroad and at home.
Empirical tests of macroeconomic and monetary theories are typically conducted using non-experimental field data provided by government agencies. Modern theories, however, have increasingly imposed restrictions on individual behavior that are not embodies in any available field data.
Although the economic performance of the U.S. economy in 1997 was very good, it was troubling in at least one respect for the Federal Open Market Committee. Traditional signals of inflation—rapid money growth and high levels of economic activity—were not accompanied by higher inflation.
Many countries mandate inflation control as the paramount objective for monetary policy. Critics argue, however, that such a narrow focus compromises a monetary authority’s responsibility to preserve stability of the financial system. A limited focus on inflation control could thus increase financial instability.
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