How should central banks reduce inflation? - Conceptual issues

Abstract

In remarks made before the Federal Reserve Bank of Kansas City's 1996 symposium, Achieving Price Stability, Mr. King discussed how quickly a central bank should reduce inflation to its desired level following an inflationary episode. He argued that a central bank is unlikely to wish to move immediately to price stability, since there are costs to disinflation and these costs increase more than proportionally with the rate of disinflation. These costs, which arise because economic agents have to learn about the central bank's commitment to price stability, also mean that a central bank may wish to react to shocks to output as well as to inflation. But Mr. King stressed that any such response should be cautious in the period in which the private sector is still learning about the central bank's commitment to price stability.Banks and banking, Central ; Inflation (Finance)