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Price Stability and Financial Fragility (1995)

In: The Central Bank and the Financial System

Author

Listed:
  • C. A. E. Goodhart

    (London School of Economics)

Abstract

If asked to provide a practical, quantitative definition of price stability, most people would offer something like a rate of increase in the RPI, or the GDP deflator, of 0-2 per cent. This is the kind of numerical objective which those Central Banks with a direct inflation target, e.g. New Zealand and Canada, are aiming to achieve. While I have great sympathy for such an approach, I want to start by arguing that the standard measures of inflation used in such targets may be incorrect, at least in principle. Such measures concentrate on current service flow prices, and ignore future service flow prices, changes in which are indicated by changing interest rates and asset prices. This thesis was cogently argued by Alchian and Klein in a paper in 1973; they put the case so well then, that I felt that I could do no better than repeat it. So, much of section 14.2 consists of selections from their earlier work.

Suggested Citation

  • C. A. E. Goodhart, 1995. "Price Stability and Financial Fragility (1995)," Palgrave Macmillan Books, in: The Central Bank and the Financial System, chapter 14, pages 263-302, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-37915-2_14
    DOI: 10.1057/9780230379152_14
    as

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