While monetary policy action addresses the risk of unhinging of inflation expectations, attending to the structural supply constraints becomes important to ensure that these do not become a binding constraint in the long-run, making the task of inflation management more difficult. By ensuring a low and stable inflation, the Reserve Bank could best contribute to social welfare.
It is perhaps more of a surprise that his discussion seems to have been somewhat forgotten afterwards. As recently as in the early 1990s, conventional wisdom appears to have been “keep prices stable and you will minimize the danger of a financial crisis”. After several financial crises, and in particular with the Japanese experience in mind, few would subscribe to this view.