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Speech Outline Zlero Inflation W. Lee Hoskins Citv Club (at Fed) 4-17-eo I. Introduction A. and Welcome Pleasure to welcome members of the City Club to the Federal Reserve Bank of Cleveland I of Free Speech" escribes cftadel as "a fortress in a ar a citv" this foítress we call the Federal that we can trol the . addressed the City Club on the of money for the economv's en an issue of longstandiríg Why- is there so much attention paic to a little inflation? 1. "A little inflation is like a little pregnancy - it keeps growing." Leon Henderson (1895- ) e mushrooms." Valentina recent inflation in USSR ed in the economy, it is o remove cy in the U.S. over current rate of le, "As far as economic analysis rate of 4 or 5 percent does úery wP,3-25-gO' House of Representatives to bring I floor C. help us realize the goal -2- tr. Benefits of Price Stability v reaffirms notion that inflation is a s n has long been associated 3. Brazi a. b. 1. 2. 3. 4. with ion was,2,700% per year osed draconian ñreasures against Íroze prices for 30 davs ftoze inost bank depósits for 18 months created a new violators of t c. d. :retary for economic policv, "Hyperinflation would píobably wreck dhe démocratic system" B. Maximi 1.M 2. In 3. 20-60%; instead must C. Costs 1. 2. 3. ble inflation ptions and misallocations of resources 1980s fy by adding risk to decisionmaking stments ies by causing people to invest scârce havei the soleþrpbse of hedging -3- III. why isn't there widespread support for this goal? Perceived costs of dlsinflation A. General belief -- Costs of fully anticipated, stable rate of inflation are less than the costs of transitión to stáble prices 1. Transition costs are difficult to estiinate a. b. temporary reduction in output wotíld be reduced bv fhe Neal Resolution 1. Resolution mandate's the Fed to eliminate inflation costö stability thereafter timates are generated by large-scale s, wnere expectations are expectations are over time in-such a model, only through a recesslon e c. 1,. 2. 3. 2. Stead a. b. n system, 4% inflø.ûon reduces the rve Bank of Cleveland indicate that the present value of income loss associated with current rate of iriflation is much higher than the output loss during I the 1980 to 1982 recession þeriods B. IV. Transition costs depend on the adjustment of decisionmakers 1. formulation oÏ expectations' 2. credibility of the Federal Reserve Chasing Multiple Goals and Expectations A. ye on inflation, one on economic 6 ent B. will not adjust very quickly Neal 1. 2. Fed commit to the one variable that the I in the long run -- price level people would know that the Fed iõserious C. 'Fed's actions must give people r CPI, PPI,IPD etc. ,"d",,f T.,""iI c. äï :lî'å: å; .åilåF:ilîål 1r of the general level of prices ceases tobe a factor in individual and busineõs decisionmakinq" why no inflation? as the soviet legislatör implied, the only way to prevent big mushroonu islo prevenf little ones -4- v. should we Let Anything stand in the wuy - current Fiscal policy A. We are all familiar with cause high interest rates order tokeep interest ra B. Some are concerned that a monetary policv that strives for zero progress ttråt we have made over the past sever policy rates at cufrent pressure on interest rates, t the inflat 1. 2. 3. eral budget deficits netary põlicy in full dniployinent pu not éituation with monetary policy It is the real interest ratê that áffects the consumption and production decisions of individuals and busines'sses and ãllocation of resources C. Monetary policy çanngJ offset whatever harm may result from fiscal policy -it can ónly add to those costs VI. Conclusion A. We have_been taught an important lesson, let,s learn 1. Inflation is dïsruptiveio economic erowth 2. Once inflation is^started, it is hard tö stop B. We should support monetary policy that strives for price stability, we should supporf zero inflation it
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