Bernanke (2004) argues that in such a scenario of inefficient monetary policy, the volatility of both output and prices can be reduced by moving to better policies. In other words, in the presence of an inadequate monetary policy, the outcome could be excessive volatility of output and inflation, and, hence, moving to an efficient policy can “shift the tradeoff to the origin” between output and inflation volatility, reducing both of them. In other words, improvements in monetary management can allow reaching an efficient frontier. For example, a monetary policy that reacts insufficiently to changes in inflation, without fulfilling the Taylor principle, or a policy too optimistic on the full employment level of output, could end up generating unnecessary volatility and inflation. These are reasonable explanations for the conduct of monetary policy in the US before the 1980s’ disinflation. This policy inefficiencies could be even aggravated by a belief on a permanent unemployment/inflation tradeoff, leading potentially to Friedman’s accelerationist hypothesis. However, I want to emphasize the credibility bonus that comes with commitment to inflation stabilization. In a standard Phillips curve framework, inflation depends on the output gap (the reason for the output/inflation volatility tradeoff), inflation expectations, and a set of other variables including inflationary shocks. Let’s consider the case of low credibility in a low inflation objective. In such a case, an inflationary shock may feedback into price and wage formation, requiring a more aggressive monetary policy response, and hence, making it costlier to reduce inflation.
Bartering is a complicated and time-consuming process. Someone who wants to sell an item has to find a buyer who wants that particular item at that particular time. And the buyer must also be able to offer something in exchange that the seller wants. The need for a third item that could serve as an intermediary in the bartering process thus arose at an early stage in the history of civilisation. Metals of various kinds, especially silver and gold, soon acquired a central position as a currency for trade as they are relatively durable and easy to transport and divide. An important step in the development process was taken when people began to use the metals to mint coins. This made it possible to use an authorised stamp that guaranteed that the metal content and weight were correct. The next logical step was taken when people realised they could use pieces of paper to represent the value of a metal coin. In other words, notes that could be exchanged for metal coins on request. This made handling and transportation even easier and worked as long as the public accepted the notes as a means of payment and had confidence in those who issued them. A further stage in the development process was reached when it became possible to issue money without the back-up of reserves in the form, for example, of gold and silver.