What monetary policy cannot do, in and of itself, is produce economic growth. Economic growth stems from increases in the supply of capital and labor and from the productivity with which labor and capital are used, neither of which is directly influenced by monetary policy. However, without doubt, monetary policy can help foster economic growth by ensuring a stable price environment. Some would argue that establishing price stability as the primary goal of monetary policy means that a central bank would no longer be concerned about output or job growth. I would like to make explicit for the record that I believe this view to be simply wrong.
Price stability is the absolutely essential means to produce sustained economic growth.
Indeed, a stable price and financial environment that the public expects to persist almost certainly will enhance the capacity of monetary policy to fight occasions of cyclical weakness in the economy. In my view, a goal of price stability requires that monetary policy be oriented beyond the horizon of its immediate impact on inflation and the economy. This horizon is on the order of two to three years and it is important, in part because it sets the stage for what comes later. But the longer-run purpose of today's policy actions should be to lay the foundation for price stability and sound economic growth over the coming decade. This orientation properly puts the focus of a forward-looking policy on the time horizon most important to household and business planning.