The Federal Reserve currently pursues both price stability and full employment. Congress is debating whether to make price stability the overriding goal of monetary policy. This paper argues against such a change for several reasons. First, under the current mandate the U.S. has experienced low...

This paper develops a real-exchange production-coordination model in which price-setting firms produce complementary inputs that are converted into and traded for a final good produced by a competitive sector. A rigid real-price regime is shown to be consistent with both rational firm behavior...

The 1970s witnessed a backlash against inflation. However, Japan's prolonged stagnation and the global economy's recent flirtation with deflation have revived the case for low inflation. Low inflation acts as grease in labor markets, helping the process of adjustment and lowering equilibrium...

It has been widely held that nominal disturbances influence real economic activity by distorting the public's perception of relative prices. Implicit in this hypothesis is the assumption that there is a lag in the public's perception of the aggregate price level. This paper tests this assumption...

There are two generally accepted ways of plotting the aggregate demand (AD) and aggregate supply (AS) curves in the goods market. One puts the price level on the vertical axis (the P - y approach); the other plots the real interest rate on the vertical axis (the r - y approach). This paper...

This empirical study tests the relative merits of five competing product/factor market explanations of relative price stickiness in SIC industries. The five arguments are, (1) Okun: implicit contracts via customer-seller relations; (2) Hicks: inventory behavior of speculative traders; (3)...

After two decades of successfully restoring price stability in much of the world economy, central banks begin the next millennium facing a new set of challenges. One key task is how to conduct monetary policy in an era of price stability. Clearly, policymakers would like inflation to remain...