Monetary Policy when Inflation is Low

This paper examines several key issues concerning the implications for monetary policy of the achievement of low inflation in OECD countries during the 1990s. In particular, the analysis considers whether there have been improvements in monetary policy transmission mechanisms that lower inflation vulnerabilities, or make it easier to reduce inflation pressures when they arise; and the further benefits and costs likely to be involved in lowering inflation to zero, or in attempting to maintain a stable price level. The analysis supports three main observations. First, there have been significant changes, particularly in inflation expectations and in monetary policy frameworks, that should help in containing inflation and lowering the costs of doing so. However, except in the United States and the United Kingdom, there is little evidence yet of fundamental changes in wage and price behaviour underlying the flexibility of labour and product markets; although it is possible that this ...