Table Of ContentPRICE 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
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First published 1993 by
THE MACMILLAN PRESS L TO
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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
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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
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