##ilizing both inflation and economic activity. 2 those two goals are related : maintaining price stability promotes stronger economic activity in the long run. what do we mean by price stability? a widely cited definition is that the inflation rate is sufficiently low so that households and businesses do not need to take inflation into account i'd like to thank etienne gagnon, steven kamin, linda kole, andrew levin, and david lopez - salido for helpful comments and assistance with this speech. indeed, this specification of monetary policy objectives is exactly what is suggested by the dual mandate that the congress has given to the federal reserve to promote both price stability and maximum employment ( mishkin, 2007a, 2008 ). in making everyday decisions. 3 broadly speaking, i believe this definition of price stability is a reasonable one, and in practice, central banks around the world have chosen average levels of inflation between 0 and 3 percent as consistent with this criterion. however, this range can be narrowed a bit further by considering the implications of economic theory and empirical evidence about the average inflation rate that produces the best economic outcomes. in particular, the literature on the optimal inflation rate not only bolsters the case for low inflation but also highlights the risks of maintaining an excessively low inflation rate. the case for low inflation all economists agree that hyperinflations, such as the one in germany in the 1920s, are particularly damaging due to the resulting distortion of economic incentives and the waste of valuable resources. even rates of inflation far short of hyperinflation appear detrimental to economic performance, as evidenced by the double - digit inflation rates of the 1970s. and over the past decade or so, central bankers and academic economists have reached a remarkable degree of consensus about the desirability of low and stable inflation – and as you know, arriving at a consensus is quite rare for economists. the average rate of inflation distorts the efficient allocation of resources through three main channels. first, because some firms face costs in changing their prices, a rise in the general price level tends to generate undesirable movements in relative prices, thereby leading to an inefficient allocation of resources. this relative price dispersion increases with inflation, and the desirability of minimizing these relative price distortions provides a key rationale for price stability. 4 second, inflation is an implicit tax on capital. in an imperfectly indexed tax system, inflation seriously distorts saving and investment because investment income is taxed

, financial stability report ( washington : board of governors, november ), https : / / www. federalreserve. gov / publications / 2020 - november - financial - stability - reportpurpose. htm. see the committee ’ s march 23, 2020, postmeeting statement ( quoted text in paragraph 2 ), which is available on the board ’ s website at https : / / www. federalreserve. gov / monetarypolicy / fomccalendars. htm. see lorie logan ( 2020 ), “ treasury market liquidity and early lessons from the pandemic shock, ” speech delivered at the brookings - chicago booth task force on financial stability ( tffs ) meeting, held via videoconference, october 23, https : / / fedinprint. org / item / fednsp / 88983. - 7been suggested to strengthen the resilience of the treasury market. for instance, further improvements in data collection and availability have been recommended to enhance transparency related to market participants, such as broker - dealers and hedge funds. some have suggested that the federal reserve could provide standing facilities to backstop repos in stress conditions, possibly creating a domestic standing facility or converting the temporary foreign and international monetary authorities ( fima ) repo facility to a standing facility. 9 other possible avenues to explore include the potential for wider access to platforms that promote forms of “ all to all ” trading less dependent on dealers and, relatedly, greater use of central clearing in treasury cash markets. 10 these measures involve complex tradeoffs and merit thoughtful analysis in advancing the important goal of ensuring treasury market resilience. offshore dollar funding markets the global dash for cash also led to severe stress in offshore dollar funding markets, where foreign exchange swap basis spreads increased sharply to levels last seen in the global financial crisis. foreign banking organizations serve as key conduits of dollar funding for foreign governments, central banks, businesses, nonbank financial institutions, and households. 11 see board of governors of the federal reserve system ( 2020 ), “ federal reserve announces establishment of a temporary fima repo facility to help support the smooth functioning of financial markets, ” press release, march 31, https : / / www. federalreserve. gov / newsevents / pressreleases / monetary20200331a. htm ; and board of governors of the federal reserve system ( 2019 ), “ minutes of the federal