Countries with high inflation rates tend to find themselves on the steeper portion of the short-run Phillips curve than low inflation countries which are more likely to be on the flatter side. Therefore, ‘trade-off’ between price stability and employment or output even when it does exist, is sharper for countries with relatively high inflation rates than those with low inflation rates. 14.
The case of price stability as the objective of monetary policy rests on the fact that volatility in prices creates uncertainty in decision making. Rising prices affect savings adversely while making speculative investments more attractive. The most important contribution of the financial system to an economy is its ability to augment savings and allocate resources more efficiently.