Central Banks and Price Stability: Is a Single Objective Enough?

Abstract

It has been common practice that by statute, central banks are required to pursue multiple macroeconomic objectives. Together with the spreading of central bank independence, there has been a tendency to limit the number of objectives that the autonomous central bank should pursue. In fact, it has been widely claimed that, in order to boost credibility and to avoid the time inconsistency problem which frequently affects governments policy decisions, it is necessary to set a single objective for the central bank, and that the single objective should be to attain and maintain price stability. It is possible to assert that operational capabilities of the central bank are not severely handicapped by full price stability and, that even at low levels of inflation, it is worthwhile for central banks to strive towards the achievement of zero price changes.