more - stable inflation, by making the returns to saving and investment more predictable and by diminishing the likelihood of shocks to the financial system, should encourage economic growth. for example, the united states has experienced a higher average, and less volatile, growth rate since the mid - 1980s. this " great moderation " has been attributed by most observers, at least in part, to improved monetary policy and, by extension, to lower and more - stable inflation. 11 low and stable inflation offers other benefits as well, which may affect the growth rate of gross domestic product ( gdp ) over time. these include reducing the arbitrary redistributions of wealth and income associated with higher and more - variable inflation and shrinking the distortions to resource allocation in the tax code. 12 accordingly, and i am obviously not alone in this view, it is clear that central banks should strive to achieve low, stable inflation. of course, low inflation is at best a necessary, but not sufficient, condition for growth. in many poor economies, inflation may be less of an obstacle to development than poor governance, inadequate education, and legal systems that fail to protect property rights or to enforce commercial contracts. yet, no tradeoff forces countries to choose between lowering inflation and reforming their institutions. on the contrary, high inflation is often a sign of institutional breakdown, and reducing inflation may help to rebuild confidence in economic and political prospects. conclusion in conclusion, let us not forget that the declines in inflation over the past two decades and the resulting boost to monetary credibility we currently enjoy were earned with some economic pain, as the pace of economic activity was slowed, at times severely, to bring inflation down. with longer - run inflation expectations better anchored now throughout the world, i believe that global economic growth will be stronger and more resilient as a result. if the academic evidence does not yet unequivocally support this conclusion, perhaps it is because we are only starting to see the return to sacrifices made in the past. my generation of central bankers has the job of maintaining the victories of the previous mohsin s. khan and abdelhak s. senhadji ( 2001 ), " threshold effects in the relationship between inflation and growth, " imf staff papers, vol. 48, pp. 1 - 21. an earlier imf staff paper also found a negative, nonlinear relationship. see atish ghosh and steven phillips ( 1998 ), " warning : inflation may be harmful to your growth, " imf

half of the sample period averaging about a third of what it was in the first half. in addition, they find that these declines tended to be larger in countries where central banks increased the weight they placed on fighting inflation. the gagnon and ihrig result represents evidence that a strong commitment to price stability can lead to more - stable prices, but it leaves open the extent to which central bank credibility - - as opposed to policy action - - contributes to this outcome. other research, conducted by laxton and n'diaye at the imf, shows that a model of inflation and unemployment performs better when inflation expectations are entered into the model as a function of long - term bond yields than when such expectations are assumed to depend on past inflation alone. 4 thus, their research affirms the influence of inflation expectations on actual inflation. whether these expectations reflect monetary credibility, as the researchers argue, remains unclear. joseph e. gagnon and jane ihrig ( 2004 ), " monetary policy and exchange rate pass - through, " international journal of finance and economics, vol. 9, pp. 315 - 38. douglas laxton and papa na€™diaye ( 2002 ), " monetary policy credibility and the unemployment - inflation tradeoff : some evidence from 17 industrial countries, " international monetary fund working paper / 02 / 220, december. 2 / 5 finally, there is considerable literature on the effects of central bank independence on inflation. 5 in one standard view, politically motivated desires to stimulate the economy, run budget deficits, or redistribute wealth in favor of one social group or another are important sources of inflationary pressure. these pressures have long been part of the political landscape, and indeed, it was for these reasons that the framers of the federal reserve sought to insulate the fed from political pressures. 6 that central bank independence frees the monetary authority to pursue price stability more diligently, resulting in lower and less - variable inflation, is supported by many studies. 7 inflation tends to be lower in countries where there are legal and other institutional safeguards to central bank independence. of course, such results still do not tell us whether central bank independence matters mainly because it allows the central bank to pursue better policies or because it boosts the central bank's credibility. in spite of this ample academic evidence of the role of good policy and central bank independence in achieving price stability, we must face the fact that the particular contribution of monetary credibility, as contrasted