ABSTRACT
Considerable progress has been made in reducing inflation in the United States. During 1992, consumer inflation ran at about 3 percent, the lowest rate since the mid-1960s. Federal Reserve officials have made it clear that reducing inflation further, to near-zero rates, is the long-run goal of US monetary policy. This lack of credibility is important because it means that the cost, in terms of lost output and employment, of further reductions in inflation may be larger than would otherwise be necessary. Unfortunately, the quality of the signals about the thrust of policy emanating from these aggregates has been garbled by financial innovation. The creation of new monetary and non-monetary instruments has altered the relationships between the various aggregates and spending in the economy, and this has made it difficult for the public to judge whether the Fed is maintaining its commitment to low inflation.
