But at a minimum, we can conduct monetary policy so that the economic ups and downs are not exaggerated, and in fact smoothed out. Again, experience has taught us that a policy of low and stable inflation works best to stabilize the economy in the short run.
How do we go about achieving a more stable economy through our focus on low and stable inflation? Theory tells us that we can provide confidence in the value of money in one of two ways. By fixing the external value of our currency to that of a low-inflation country and letting domestic prices move around in response to shocks.