Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch.
The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s.
So I think you will agree that price stability is valuable and it is an important goal of monetary policy.
This is fitting since over the longer run, monetary policy is the principal determinant of inflation.
Today I will focus on some open research questions surrounding inflation from a policymaking viewpoint.
I toyed with the idea of titling my talk “We Need Your Help,” but thought better of it.
It helps foster financial stability by minimizing unexpected transfers from lenders to borrowers that happen when inflation causes loan values to fall.
And by fostering confidence in the economy, price stability supports growth and maximum employment, the other part of the Fed’s dual mandate.
These relative price changes provide important information for businesses and consumers when deciding where to allocate their scarce resources.
Another significant benefit of price stability is that it promotes the other important responsibilities of the central bank.