In the late 1970s, John Taylor suggested an alternative set of options for policymakers to consider, one consistent with macroeconomic theory. These alternative options involve a tradeoff between the variability of output and the variability of inflation. Satyajit Chatterjee explains the logic underlying this new variability-based policy menu and discusses its implications for the conduct of monetary policy.

This article appeared in the Third Quarter 2002 edition of Business Review.

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