The belief that monetary policy should be geared towards price stability is firmly rooted in economic theory which clearly demonstrates the costs of inflation, both in terms of allocative inefficiencies and arbitrary redistribution effects. At the same time, these arguments suggest that maintaining price stability in itself contributes to higher growth and employment.
Several empirical studies have concluded that, across a large number of countries, it is on average those with lower inflation which appear to grow more rapidly. While there is a widespread agreement on the benefits of price stability, it is less clear exactly what price stability means.