THE ALGEBRA OF PRICE STABILITY

In this paper, we propose two definitions of price stability that enco mpass the interpretations of price stability found in the economic lit erature. To determine the conditions under which monetary policy can a chieve price stability, we examine several well-known classes of monet ary rules including the targeting of monetary aggregates, nominal GNP, prices, and interest rates. In addition, we use a linear rational exp ectations model to explore the degree to which price stability constra ins short-term stabilization policy. We find that price stability does not necessarily prevent the monetary authority from pursuing short-te rm stabilization goals.