The Significance of Monetary Stability

The treaty establishing the European community proclaims price stability as one of the principles of the community and the member countries. It declares price stability as the primary objective of the European System of Central Banks (ESCB). Price stability in the sense of the treaty means that money will maintain its buying power over time. There is an array of convincing arguments for establishing this objective:

A stable price level leads to higher standards of living by reducing the uncertainty about future developments and thus lowering transaction costs.

In addition, price stability contributes to the common good by lowering the risk premium for interest rates.

Thirdly, it decreases the probability that single market players withhold resources in order to protect themselves against inflation or deflation.

Last but not least, price stability prevents arbitrary distribution of capital and income, e.g. by consuming the "real value" of nominal claims  (savings in the form of bank deposits, government loans, nominal wages) in the course of inflation. A strong fall in value of real capital and income due to high inflation may result in social unrest and political instability.


You will find further information (in German) here: http://www.bundesbank.de/bildung/bildung_veroeffentlichungen.php