ng the evidence pertaining to inflation and growth as we are. Consistent attempts to expand the economy beyond its potential forproduction will result in higher and higher inflation, while ultimately failingto produce lower average unemployment. Therefore, most economists would arguethat there are no long-term gains from consistently pursuing expansionarypolicies. Monetary policy can determine the economy's average rate of inflation inthe long run. And that's important for the economy, because high inflation canhinder economic growth. For example, when inflation is high, it also tends tovary a lot, and that makes people uncertain about what inflation will be in thefuture. That uncertainty can hinder economic growth in a couple of ways--it addsan inflation risk premium to long-term interest rates and it complicates theplanning and contracting by business and labor that are so essential to capitalformation. High inflation also hinders economic growth in other ways. Forexample, because the tax system isn't in agreement with inflation, highinflation arbitrarily helps and hurts different sectors of the economy. Inaddition, it makes people spend their time hedging against inflation instead ofpursuing more productive activities. Because the government can determine the economy's average rate ofinflation, some commentators--and some members of Congress as well--haveemphasized the need to define the goals of monetary policy in terms of pricestability, which is achievable. One kind of conflict involves deciding which goal should take precedenceat any point in time. For example, the government needs to be careful to avoidletting short-run temporary successes in preventing employment losses duringrecessions lead to longer-run failures in maintaining low inflation. Anotherkind of conflict involves the potential for pressure from the political arena.For example, in the day-to-day course of governing the country and makingecono...
