SMP: On the Delusions of Price Level Stability

One of the lessons that should have been learned after the 2008 crisis is that price level stability does not guarantee economic and financial stability. Rather, central bankers and policy makers understand that the lesson is there should be even more regulation.

In a recent column, William White explains how “major central banks’ vigilant pursuit of positive but low inflation has become a dangerous delusion.” The idea that price level stability is both, necessary and sufficient to achieve macroeconomic stability and growth should have been put to rest by the 2008 financial crisis. But conflicting narratives have enabled it to live on.

Since the crisis, the focus of many central bankers has turned to macroprudential policy. The objective is to manage financial risk. Regulatory efforts have increased as a result. On the monetary policy front, price level stability still reigns supreme. New tools have been developed to execute monetary policy, to be sure. But the overall objective has been more-or-less left intact.

Keep reading at Sound Money Project.

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