ABSTRACT
A number of central bank laws express concern with maintaining the external as well as the internal value of the currency. Price stability actually helps to increase employment and growth, the chapter shows that there is a strong case for adopting central banking institutions designed to promote long-run price stability. Given the preponderance of evidence that, over the long term, price stability promotes growth, the case for choosing long-run price stability as the goal for monetary policy is quite strong. The Swiss National Bank and the Bank of Canada are examples of central banks whose mandatory objectives combine price stability with a potentially conflicting full-employment objective. The traditional approach to central bank independence has assumed that governments will tend to display an inflationary bias in their discretionary policy activities. The search for institutional designs which will provide favorable trade-offs is one of the most important issues in the political economy of monetary policy.
