Price Stabilization in the 1990s: Domestic and International Policy Requirements PDF
Preview Price Stabilization in the 1990s: Domestic and International Policy Requirements
PRICE STABILIZATION IN THE 1990s Price Stabilization in the 1990s Domestic and International Policy Requirements Edited by Kumiharu Shigehara Head of the Economics Department Organization for Economic Co-operation and Development, Paris and former Director-General, Institute for Monetary and Economic Studies, Bank of Japan M © The Bank of Japan 1993 Softcover reprint of the hardcover 1st edition 1993 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1993 by THE MACMILLAN PRESS L TO Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world ISBN 978-1-349-12895-2 ISBN 978-1-349-12893-8 (eBook) DOI 10.1007/978-1-349-12893-8 A catalogue record for this book is available from the British Library. Contents Foreword by Yasushi Mieno viii Preface x Notes on the Contributors xiii 1 Price Stabilization in the 19908: An Overview John B. Taylor 1 2 Some Lessons from the Great Inflations Allan H. Meltzer 7 3 Lessons from Moderate Inflations Stanley Fischer 30 I PRICE PERFORMANCE AND SOURCES OF INFLATION 4 Inflation in North America Michael Parkin 47 Comments Ralph C. Bryant 84 Paul Jenkins 90 5 Inflation in Western Europe Eduard J. Bomhoff 94 Comments Anthony Coleby 126 Andre Icard 131 6 Inflation and Monetary Policy in Pacific Basin Developing Economies Maxwell J. Fry 137 Comments Glenn R. Stevens 165 Han Eung Kim 169 Zainal Aznam Yusof 172 v vi Contents Supplement Inflation in Australia Glenn R. Stevens 176 New Zealand Experience with a Price Stability Target Peter Nicholl 187 7 Japanese Monetary Policy from 1970 to 1990: Rules or Discretion? Kazuo Veda 191 Comments Koichi Hamada 213 Jack H. Beebe 216 Supplement The Role of Monetary Policy in the Process of Disinflation in OECD Countries During the First Half of the 1980s 221 II MEASUREMENT AND INDICATORS OF INFLATION 8 Measuring the Aggregate Price Level: Implications for Economic Performance and Policy Robert J. Gordon 233 Comments Richard G. Davis 269 Georg Rich 273 9 Indicators of Inflation Robert H. Rasche 277 Comments Peter Nicholl 319 Takatoshi Ito 325 III PRICE OBJECTIVES AND POLICY REQUIREMENTS 10 Price Stability and the Monetary Order David Laidler 331 Contents vii 11 Achieving Exchange Rate Stability in a Tripolar World: A Target-Zone System with a Rotating Anchor Kenneth Rogoff 357 Comments Donald L. Kohn 378 Reiner Konig 386 Programme of the Conference 390 Participants 392 Index 395 Foreword This book is a record of the proceedings of the international confer ence, sponsored by the Institute for Monetary and Economic Studies of the Bank of Japan and held in Tokyo on 24-25 October 1991. The first conference of this sort was organized by the Institute in June 1983, following its establishment in October 1982 on the occasion of the centenary of the Bank of Japan. This conference, the fifth in a continuing series on major policy issues, is devoted to 'Price Stabilization in the 1990s: Domestic and International Policy Requirements' . Achieving and maintaining price stability is ever the most import ant task of central banks. But, inflation history is much older than that of central banks. Indeed, Japan's recorded history shows that some twelve centuries ago, only a few decades after metal coins were minted for the first time in Japan, the price of rice - an important measure of the cost of living at that time - tripled in five years, due partly to bad crops, but also to an increase in money in circulation. Unfortunately, we do not have to look that far back for episodes of high inflation. There are a number of such episodes in the history of the Bank of Japan which was established in 1882. And, most of the countries represented at this conference, including my own, suffered from sharp price increases in the 1970s, which were, I think, largely a result of wrong macroeconomic policy management with too heavy emphasis on 'fine-tuning' of the economy. The reduction of the deep-rooted inflation of the 1970s was the most significant achievement of economic policies in the industrial ized world in the first half of the 1980s. While restrictive fiscal policies contributed to the disinflation process, the most important factor accounting for the process was monetary restraint in industrialized countries. Unfortunately, the reduction of inflation was associated with recession and increases in unemployment rates in many countries where wage flexibility was fairly limited. In light of the costs of disinflation, it is important that price stability, once achieved, be maintained. To stem inflationary pressures emerging in the late 1980s, central banks in many industrialized countries took corrective actions. Such actions were taken at an earlier stage than they were in similar episodes of the 1970s. It is too early to say whether our actions have been successful. viii Foreword ix In any event, I would argue that it would be less costly to maintain price stability or low inflation through non-accommodation of shocks as they occur. We should not permit inflationary pressures to mount to levels that become economically and politically intolerable. While we often talk about the significance of price stability, it is not an easy task to precisely define what it means. Let me take up a case in point in my country. Our price record in terms of conventional measures of inflation, the wholesale price index, the consumer price index, and GNP deflator, was remarkably good in the second half of the 1980s. Such price stability was associated with sustained growth of domestic demand, resulting from a combination of domestic monet ary ease and a sharp appreciation of the Japanese yen following the Plaza Accord in the autumn of 1985. But price stability in terms of conventional measures was also associated with sharp increases in asset market prices, in particular real estate and equity prices. In light of this experience, I attach importance to the careful assessment of policy implications of the asset-price inflation we experienced over the late 1980s, as well as the appropriate definition of price stability. Inflation is a monetary phenomenon in the long run. But, in the short run, non-monetary forces can also playa significant role in the inflation process. Domestically, anti-inflation monetary policy must be supported by sound fiscal policy and structural reforms which should increase price and wage flexibility and reduce the costs of disinflation. Moreover, in this increasingly interdependent world, no country can shield itself from the impact of inflation in foreign countries. This means that larger countries in particular must be jointly responsible for achieving price stability for the world economy as a whole. I hope discussions at this international conference will help central bank policymakers pursue their price stabilization objective in the 1990s in this global framework. Y ASUSHI MIENO Governor, Bank of Japan Preface Achieving and maintaining price stability is ever the most important task of central banks. In a recent report by a high-level expert group on the role of central banks in globalized financial markets chaired by Valery Giscard d'Estaing, it was noted that: An important lesson gained from economic policy management over the past two decades is indeed the primary importance of price stability as the ultimate objective of monetary policy, to be conducted by independent central banks taking a long-term view and being immune from day-to-day reactions to economic and financial developments. Another lesson is that a short-run trade-off exists between lower inflation and securing employment oppor tunities, but that central banks should not aim at addressing con flicting goals. Hence, central bank efforts towards price stabilization need to be complemented by governmental fiscal policies and by structural policies to improve the labor and product markets in order to minimize the social costs involved in the process of disinflation. This book is a record of the proceedings of the international conference, sponsored by the Institute for Monetary and Economic Studies of the Bank of Japan and held in Tokyo on 24-25 October 1991. The conference was devoted to 'Price Stabilization in the 1990s: Domestic and International Policy Requirements', and a dis tinguished group of policymakers and senior advisers at central banks in East Asia, Oceania, North America and Europe as well as those at international organizations and academic experts at home and abroad were invited to share their views and research results on various aspects of this vital topic. The conference was composed of three sessions. The first session reviewed how non-monetary forces working on the process of wage and price formation in different economies developed and how monetary policy affected inflation in the 1980s. Four separate country/region studies were prepared for this session. The first one by Professor Michael Parkin analysed inflation in North America. The second one on Europe was prepared by Professor Eduard J. Bomhoff, the third on several dynamic Asian economies by Professor x
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