Styles of Monetary Management

Abstract

Although the task of providing “sound money” to the economy was attributed to central banks as early as the late eighteenth century, the importance of price stability has grown significantly for both central banks and the general public since the high inflation of the 1970s. Through that experience a new generation became aware of the association of fiat money regimes with inflationary bias in public and private economic behavior and recognized how much the public good of monetary stability contributes to the material and moral welfare of society. Of the three measures of the value of money — expressed respectively in terms of the goods and services available in the country of the currency (the index of prices), of other currencies (the exchange rate), and of the currency itself in the future (the interest rate) — the first is now generally deemed to be the most important. Price stability today is viewed as a precondition for lasting economic growth: this was not the case twenty-five years ago, when I joined the central bank of my country.

The author expresses his gratitude to Paolo Del Giovane and Valeria Sannucci for assistance and advice in the preparation of this paper. I. Angeloni, L. Guiso, M. Magnani, D. Terlizzese also provided useful comments and suggestions. Responsibility for opinions and errors belongs to the author.