Panel Discussion

Monetary policy controls nominal variables--in level form, the price level, monetary aggregates, the exchange rate, and nominal GDP; in rate-of-change form, the inflation rate, nominal interest rates, and growth rates of money, exchange rates, and nominal GDP. Monetary policy has uncertain, and usually short-lived and minor, influences over the main real variables, such as real exchange rates, real GDP, and real interest rates. The central bank’s principal mission ought to be to control nominal variables so as to provide for a stable framework within which the private economy gets accurate signals and can therefore make efficient allocations of resources. Within this context, a promising, but not fully articulated, guideline is price stability. Charles Goodhart and Jos~ Vifials point out that many countries have adopted this goal, but typically have not detailed its meaning. One well-defined objective is the minimization of departures of an index of the general price level from a prespecified path, which could be a constant. Alternatively, the central bank can manage its monetary instruments to hold down surprise movements in the price level, while simultaneously targeting a nominal interest rate. Either objective implies accommodating movements of monetary aggregates to shifts in money demand, but the forms differ in the prescribed reactions to past price-level errors. One issue that arises in any program of monetary policy is the mechanism to ensure a credible commitment to a particular course of action. In the absence of such commitments, the central bank tends to respond, each time, to the value that it places on surprise increases in