Download file 398 KB Texto completo en español More of: José De Gregorio

A wide-ranging debate is underway about the causes of the "great moderation," a phenomenon observed since the mid-eighties in industrial economies, which has signified a reduction in the volatility of not only inflation but also product. Explanations vary from good luck to good policies. In this document the author contends that monetary policy was an important determining factor in this phenomenon. The time difference in the occurrence of stabilization between developed and emerging countries and the coincidence with the conquest of inflation support the idea of a causal direction from inflationary control to less volatility in activity and prices. Improvements in monetary management thus contribute to the stability of both prices and the economic cycle. The author also discusses the subject of maintenance of stability in the context of severe inflationary risks, resulting from one of the biggest inflationary shocks in the post-World War II period. He states that price shock will probably persist for a considerable period of time and that some second-round effects are inevitable. The author maintains that monetary policy should be concerned about —and occupied with— the dynamic of instability, which can generate increases in inflation that will be too costly to contain later. He emphasizes the need to make sure that the benefits achieved during the great moderation phase are preserved, because it would be irresponsible to return to unstable times in the interest of achieving short-lived earnings.