- off between output growth and inflation. the intellectual basis of policy was the phillips curve. eventually, however, the stagflation that marked the 1970s caused both the objective of policy and its implementation to be reassessed. today, there is a widespread consensus among central bankers, and economists more generally, that price stability should be the overriding goal of monetary policy. the rational expectations literature, and the lessons of experience, suggest that there is no exploitable trade - off between output and inflation in anything other than the very short run. moreover, inflation leads to distortions and uncertainties that impair economic performance. worse, the short - run relationship between inflation and output growth seems to be asymmetric : the output sacrifice needed to get inflation down may be greater than the output gain when inflation is allowed to rise. taken together, these considerations mean that the best service monetary policy can render for the real economy is to keep inflation credibly at low levels. in fact, policy has been remarkably successful in recent years in bringing inflation down in virtually all industrial countries. so much so, that a number of issues are now coming to the fore that were previously considered as of second - order importance. these questions include : how to avoid bias in the measurement of inflation ; whether inflation should be zero or some low positive number ; whether the authorities ’ objective should be expressed in terms of inflation or the price level ; and how quickly one should return to the stated objective after a disturbance. it is hard to dispute that measurement bias in inflation should be corrected, if possible. that is easier said than done, however. some biases can be relatively easily removed, such as that arising from infrequent re - weighting of the consumption basket. others are more difficult to deal with, such as adjusting adequately for quality changes. and some are very difficult to correct, such as properly incorporating new goods and services. still, with some heroic assumptions it should be possible to arrive at a serviceable estimate. the boskin commission in the united states has put the bias at just over 1 % ; in other countries, the bias is thought to be no more than half that. concerning the desirable level of ( properly measured ) inflation, there seems to be a consensus that a low positive number ( 1 - 3 % ) is better than zero. 1 the reasons for this are both a priori and empirical. when inflation averages zero over time, the price level must, by definition, be falling for

" the case for an international banking standard ", institute for international economics, washington, april 1997. - 11 - against the systemic transmission of instability. transparency and disclosure have an obvious role to play here. fourthly, and lastly, the international monetary system. here, too, the power of market forces seems likely to grow. this has the potential for beneficial consequences insofar as bad policies are disciplined and good policies are rewarded. but it would be naive to suggest that market forces always get it right. my expectation is that efforts will need to be devoted to promoting greater stability in the market - led international monetary system. the bulk of these efforts will be in the direction of improving policies ( and their mutual consistency ) and making markets more transparent ( e. g. through better information ). but it cannot be excluded that more direct measures will be required to limit damaging exchange rate fluctuations or contain the cost of currency crises. taken together, this presents a full agenda for central bank policy - makers. i noted at the outset of this lecture that “ the last twenty - five years have been an eventful time for central banking ”. the years ahead promise to be no less eventful.