Commentary: How Should Monetary Policy Respond to Shocks While Maintaining Long-Run Price Stability? —Conceptual Issues

Abstract

from central bank reform, because they most likely have a larger credibility problem to start with. Let me get to John Taylor's recommendations for how monetary policy should be conducted to maintain price stability. The points I would like to discuss are (1) inflation targeting implies inflation forecast targeting, (2) target rules vs. instrument rules, and (3) price level targeting vs. inflation targeting. Inflation targeting implies inflation forecast targeting I completely agree with John Taylor that having an explicit inflation target is the best way to maintain price stability, price stability here meaning low and stable inflation. (I will get to the issue of price level targeting later in this commentary.) I will extend on some implications that follow from explicit inflation targeting. A serious problem in inflation targeting is the imperfect control of inflation due to lags, supply and demand shocks, and model uncertainty. A

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