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Avoiding Significant Monetary Policy Mistakes

Quarterly Review 2821 | Published December 1, 2004

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Gary H. Stern Former President (1985 - 2009)
Preston J. Miller Former Vice President and Monetary Adviser
Avoiding Significant Monetary Policy Mistakes


We deduce properties of optimal monetary policies based on modern theory and standard empirical findings. In light of this analysis, we examine FOMC policy procedures and conclude that they put too much emphasis on short-term economic stabilization and too little emphasis on longer-term price stability. We propose a form of inflation targeting to address this problem.