LowInflation,Deflation,FuturePriceStability.pdfVIP

MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001 Low Inflation, Deflation, and Policies for Future Price Stability Keynote Speech by John B. Taylor The effects of three different inflationary environments—high inflation, low inflation, and negative inflation—on real output stability are examined by looking at the experiences of Japan and the United States during the last 30 years. I begin by going back to see how things looked from the vantage point of the 1987 international conference at the Bank of Japan. Next I trace out how economic performance has evolved since then. Economic performance appears to have been better with low inflation than with either high inflation or negative inflation. I also look at some of the reasons for the different inflationary environments. I take both an interest rate policy rule approach and a quantity theory of money approach. Both approaches suggest that monetary policy has been the key factor in generating the different inflationary experiences. Key words: Monetary policy; Inflation; Policy rule; Money growth; Zero interest rate policy Stanford University (E-mail: johntayl@leland.Stanford.EDU) 35 I. Introduction The main subject of this conference—deflationary shocks and their monetary policy responses—is an excellent one. There is a huge amount of recent research to build on, and the conference is taking place at a time when policy makers—who have con- fronted the reality of deflation and zero interest rates—can bring a wealth of practical experience and market information to bear on the subject. I want to thank the Institute for Monetary and Economic Studies (IMES) for organizing the conference. I am looking forward to the papers and to the discussion, and to coming back to these issues at the panel session at the end of the conference. In this keynot