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Controlling Inflation After Bretton Woods: An Analysis Based on Policy Objectives

This paper reviews the inflation experience in the post-Bretton Woods era in the context of alternative central bank objectives. It summarizes research on inflation-targeting issues, especially those associated with stabilizing the price level. Generally, inflation-targeting schemes do not provide a nominal anchor unless the central bank is focusing strictly on the inflation target and ignoring unemployment and the business cycle. Research summarized in this article suggests that the most important step a central bank can take to improve policy is to decide on a long-term path for the price level. Being explicit about the desired path for the price level not only reduces inflation variability at all horizons, but also gives the policymaker more flexibility to pursue output stabilization goals.

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