By Chris Cermak
WASHINGTON (MNI) – Central banks would do better to focus on price
stability due to a lack of precise measurements of output gaps in the
economies, the European Central Bank’s Athanasios Orphanides said
Saturday.
Taking questions from the audience at a Federal Reserve conference
in Washington, Orphanides said there remained a lack of accurate and
timely measurements of the output gap in an economy, and said most
policymakers in any case agree that keeping inflation in check has
positive benefits for output and employment.
“Since we can not measure one, we should actually focus on the
other,” Orphanides said. Using price stability is “an ideal solution to
the fact that we do not know exactly how to model the output gap.”
The head of the Central Bank of Cyprus said this is “what many
central banks have been doing in practice, which is placing greater
emphasis on stabilizing inflation and inflation expectations.”
Orphanides added that this had practical benefits for the overall
economy.
“The one thing most of use would agree on policy is that, if we
manage to achieve price stability, then on average, and perhaps even in
the short and the long run, we’re going to be getting right economic
activity to be around the potential of the economy,” Orphanides said.
“Most of us believe that works except for the very short run.”
** MNI Washington Bureau: 202-371-2121 **
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