If I were going to do surveys about wage cuts or increases of the sort that Janet reported on, one of the surveys I would want to conduct is to ask people as we approach the end of this century to choose between two things. If the central bank had an objective of reducing the purchasing power of the dollar to 13 cents or 7 cents over the next century, which would you prefer? I would expect the majority of the responses to be, why are you going to reduce it at all? Explain to me why the dollar is not going to purchase the same at the end of the next century as it does today. The difference between 13 cents and 7 cents is the difference between a 2 percent rate of inflation and a 3 percent rate of inflation over 100 years. I think most people would view that as a silly alternative. They would say, why not zero inflation.

CHAIRMAN GREENSPAN. If we are going to get anywhere, we can't have people literally talking at cross purposes. Janet, you did not even accept the premise with which Al is starting, that everyone agrees that we should seek price stability as a goal. If we are going to get anywhere, the question I have to ask first is whether you agree with Al that price stability is a goal we should seek. If you do not, this discussion then gets to the question of whether there is a consensus among the Committee members that price stability is something that should be our long-term goal, not how we get there. First, we have to agree on the goal.

MS. YELLEN. I would simply respond to that by saying that the Federal Reserve Act directs us to aim for both maximum employment and price stability. To the extent that there is no tradeoff at low inflation rates and there are benefits that outweigh the short-run costs, then price stability, literally zero inflation, is good and we should go for it. To the extent that there is a tradeoff, we have to weigh what to do, and I think I am pointing to the possibility of a tradeoff as we go to very low inflation rates.

CHAIRMAN GREENSPAN. So, you are discussing the issue of the transition, not the ultimate goal?

MS. YELLEN. No, I am discussing the issue of the ultimate objective. If we have to pay a permanent price at zero measured inflation in the form of permanently less employment and higher unemployment, I do not read the Federal Reserve Act as unambiguously telling us that we should choose price stability and forego maximum employment.

…

CHAIRMAN GREENSPAN: … Let me see if we can establish some structure for our discussion. Can you give me three sentences in conclusion on how you view the question: Is long-term price stability an appropriate goal of the Federal Reserve System?

MS. YELLEN. Mr. Chairman, will you define "price stability" for me?

CHAIRMAN GREENSPAN. Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions.

MS. YELLEN. Could you please put a number on that?

CHAIRMAN GREENSPAN. I would say the number is zero, if inflation is properly measured.

MS. YELLEN. Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way. My presumption based on the literature is, as Bob Parry summarized it, that given current inaccurate measurements, heading toward 2 percent is most likely to be beneficial.

A workable definition of “reasonable price stability” would seem to me to be a situation in which expectations of generally rising (or falling) prices over a considerable period are not a pervasive influence on economic and financial behavior.  Stated more positively, “stability” would imply that decision-making should be able to proceed on the basis that “real” and “nominal” values are substantially the same over the planning horizon—and that planning horizons should be suitably long.