Is Price Stability Enough?

Abstract

No one in the industrial countries should now question the substantial economic benefits associated with reducing inflation from earlier, high levels. At the same time, history also teaches that the stability of consumer prices might not be sufficient to ensure macroeconomic stability. Past experience is replete with examples of major economic and financial crises that were not preceded by inflationary pressures. Conversely, history shows that many periods of deflation, based on rising productivity, were simultaneously characterised by rapid growth. Recent structural changes in the global economy imply that this history might have more contemporaneous relevance than is commonly thought. If so, the implication is that policies directed to the pursuit of price stability might have to be applied more flexibly and with a longer-run focus than has recently been the case.

Exchange market pressures during the financial crisis: A Bayesian model averaging evidence

“…Therefore, our findings highlight the importance of price stability. Although it has been forcefully argued that low and stable inflation is not necessarily sufficient for maintaining financial stability (see, e.g., White, 2006), our results nonetheless demonstrate that price stability reduces vulnerability to adverse financial shocks. However, other variables that appear important in , such as the level of GDP per capita or the trade balance, do not seem to be robust determinants of EMP once one controls for a large set of potential explanatory variables.…”

“…As a consequence, our results highlight the importance of price stability in curbing financial pressures. Although the recent financial crisis documents that price stability is not sufficient for financial stability (see also White, 2006), our results nevertheless demonstrate the positive role the price stability plays. Other variables reported in the literature as important drivers of exchange market pressure, such as the level of GDP per capita or the trade balance -although having coefficients with the expected signs -do not appear robust in the data.…”

Financial Stability, Monetary Policy, Banking Supervision, and Central Banking

“…5 See, for example, Bernanke and Gertler (2001), Svensson (1999), Woodford (2003). For a critique, see White (2007).…”

The global credit boom: Challenges for macroeconomics and policy

“…As Turner (2009) and others have 35 See, for example, White (2006aWhite ( , 2006b highlighted, there is a need for a stronger system of "macro-prudential" regulation -which seeks to address the vulnerability of the nancial system as a whole, rather than focussing on speci c institutions. Because the nancial system has become highly globalised, a high degree of cooperation will be needed between nancial regulators in different countries to operate such a system -as the recent G20 Summit Communiqué recognises.…”