I will first refer to the Great Moderation, an expression in use to describe the decline in output and inflation volatility of industrial countries in the last twenty years. There has been significant research on the factors behind this phenomenon, better monetary policy being one of them. I will argue that in developing countries the Great Moderation was achieved about ten years ago and coincidentally with the conquest of low inflation. The timing of events supports the hypothesis of a causal relationship from inflation control to decreased output and inflation volatility. Thus, improvements in monetary policy contribute to obtaining not only price stability but also output stability, or smoothed business cycles. I will argue that the long time that passed between the great moderation in industrial countries and developing ones, cast doubts on the validity and generality of hypotheses based on common positive shocks (“good luck”), such as the decline in oil prices and technological improvement (e.g., better inventory management). The second issue I will address is the prospect for maintaining stability in a context of severe inflationary risks. Indeed, in the last quarters we have witnessed one of the largest inflationary shock in the post-World War II period. This is the biggest threat we have encountered to the impressive achievement of stable business cycles and low/stable inflation. Up to now, the shock has had enormous effects on the poor, as the prices of basic foodstuff have increased sharply. In addition, if inflation persists, the cost along the business cycle may become excruciating.

Bernanke (2004) argues that in such a scenario of inefficient monetary policy, the volatility of both output and prices can be reduced by moving to better policies. In other words, in the presence of an inadequate monetary policy, the outcome could be excessive volatility of output and inflation, and, hence, moving to an efficient policy can “shift the tradeoff to the origin” between output and inflation volatility, reducing both of them. In other words, improvements in monetary management can allow reaching an efficient frontier. For example, a monetary policy that reacts insufficiently to changes in inflation, without fulfilling the Taylor principle, or a policy too optimistic on the full employment level of output, could end up generating unnecessary volatility and inflation. These are reasonable explanations for the conduct of monetary policy in the US before the 1980s’ disinflation. This policy inefficiencies could be even aggravated by a belief on a permanent unemployment/inflation tradeoff, leading potentially to Friedman’s accelerationist hypothesis. However, I want to emphasize the credibility bonus that comes with commitment to inflation stabilization. In a standard Phillips curve framework, inflation depends on the output gap (the reason for the output/inflation volatility tradeoff), inflation expectations, and a set of other variables including inflationary shocks. Let’s consider the case of low credibility in a low inflation objective. In such a case, an inflationary shock may feedback into price and wage formation, requiring a more aggressive monetary policy response, and hence, making it costlier to reduce inflation.