An independent central bank focused exclusively on price stability has become a central part of the mantra of "economic reform." Like so many other policy maxims, it has been repeated often enough that it has come to be believed. But bold assertions, even from central bankers, are no substitute for research and analysis.
Research suggests that if central banks focus on inflation, they do a better job at controlling inflation. But controlling inflation is not an end in itself: it is merely a means of achieving faster, more stable growth, with lower unemployment.
These are the real variables that matter, and there is little evidence that independent central banks focusing exclusively on price stability do better in these crucial respects. George Akerlof, who shared the Nobel Prize with me in 2001, and his colleagues have argued forcefully that there is an optimal rate of inflation, greater than zero. So ruthless pursuit of price stability actually harms economic growth and well being. Recent research even questions whether targeting price stability reduces the tradeoff between inflation and unemployment.
A focus on inflation may make sense for countries with long histories of inflation, but not for others, like Japan. America's central bank, the Federal Reserve, is mandated not only to ensure price stability, but also to promote growth and full employment. There is broad consensus in the US against a narrow mandate, such as that of the European Central Bank. Today, Europe's growth languishes, because the ECB is constrained by its single-minded focus on inflation from promoting economic recovery.