For the moment, notwithstanding the critique of the 'natural' unemployment rate, the Phillips curve presents the possibility of lengthening the short-run 'trade-offs' indefinitely, since inflation surprises in each period can elongate the long run perpetually. But, in that case the 'trade-offs' will become sharper in each successive period. In other words, to maintain the unemployment below the 'natural' rate, policy authorities will have to inflate the economy at higher rates in each successive period. This has a major policy implication even if the economy does not operate on the long-run vertical Phillips curve. "Under the rational expectations hypothesis, as there are no deviations between actual, and expected inflation, both in the short-run and long-run, Phillips curves are treated as being vertical with no trade-off between inflation and unemployment."

In recent years, monetary policy has been promoted to the center stage of economic policy making the world over. This is a contrast to the first half of the 20th century when it was relegated solely to experimentation in the shadows. During these early years, fiscal policy was solely used; due in part to the depression of the thirties, and the remainder, to the process of post WWII reconstruction and the Keynesian doctrine that fiscal action was necessary to prevent deficiency in aggregate demand. By the late sixties and early seventies however, most of the developed world was witnessing the emergence of a combination of high inflation and low growth; i.e., stagnation, and the revered Keynesian analysis was unable to devise plausible responses to the phenomenon. Consequently, monetary policy emerged as an eminent instrument of economic policy, particularly in the fight against inflation. Issues related to the conduct of monetary policy worked their way to the forefront of policy debates during the 1980’s, as growth and price stability were the intermediate and long-term objectives. Gradually, a loose consensus emerged among industrially advanced countries that the dominant objective of monetary policy should be price stability, and from the outset of the 1990's, this belief has increased in popularity. However, differences continue to exist among central banks with regard to the appropriate intermediate target. While some consider monetary aggregates and, therefore, monetary targeting as operationally meaningful, others focus exclusively on interest rates-even though the inter-relationship between the two targets is well recognized. Again, as with all inflation-related issues, there seems to be little consensus.

The Consequences of Low Inflation on Monetary Policy

The effects of virtual price stability

Not surprisingly, this lag time has engendered a host of critics of such a narrow monetary policies. Perhaps most notably, P. Krugman has argued that while the belief that absolute price stability is a 'huge blessing' with large benefits and few drawbacks, the concept rests entirely on faith. Empirical evidence actually indicates the opposite. The benefits of price stability are elusive and the costs of achieving it are large. And zero inflation may not be a good thing even in the long run. Critiques focused specifically on the Bank of Canada's policy further argue that the Bank has been overly obsessed with reducing inflation to the detriment of other concerns. Bringing down inflation in the early 1990s required a harsh concretionary monetary policy, with extremely high short-term interest rates. For these observers, the Bank's tight monetary policy was badly mistimed, since it was applied during the recession of the early 1990s and the precarious recovery that followed. Critics also suggest that the Bank of Canada's policy surely has important long-run costs. Their argument relates to so-called 'hysteretic', which refers to the case where a variable that has been shifted by some external force does not return to its original state once the external

Some topics in this essay:
Monetary Policy, Bank Canada, Phillips Curve, Monetary Fund, Policy Price, Bank Canada's, , East Asian, Canada Europe, Conclusions Inflation, zero inflation, monetary policy, price stability, low inflation, phillips curve, inflation rates, inflation rate, central banks, inflation unemployment, economic growth, virtual price stability, trade-off inflation unemployment, objective monetary policy, low inflation monetary, inflation monetary policy,