BPEA | 1996 No. 1

A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets

Benjamin M. Friedman and
Benjamin M. Friedman Harvard University
Kenneth N. Kuttner
Kuttner headshot
Kenneth N. Kuttner Robert F. White Class of 1952 Professor of Economics - Williams College

1996, No. 1

SOMETIMES IT IS hard to leave well enough alone. During the first half
of the 1980s U.S. monetary policy was the central actor at work in
reducing the American economy’s ongoing rate of price inflation from
low double digits to low single digits-and, moreover, doing so at a
real cost that was at most consistent with existing estimates of the cost
of disinflation, if not a little better. In the first half of the 1990s inflation
slowed further, again at a real cost well within the range of standard
“sacrifice ratio” calculations. For well over a year, as of the time of
writing, unemployment has been at or below the conventional 6 percent
estimate of the “nonaccelerating inflation” rate of unemployment,
while inflation itself, after allowance for the upward bias in the current
consumer price index (as recently evaluated by the advisory commission
established by the Senate Finance Committee), is within 1 percentage
point of zero. Yet despite this impressive track record of success over
a period now spanning a decade and a half, there is still no end to calls
for fundamental reform of the way in which the Federal Reserve System
goes about making monetary policy.