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Can Inflation Be Too Low?

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  • Torben M. Andersen

Abstract

Price stability has become the predominant goal for monetary policy. Should the aim be zero inflation or could inflation be too low making it better to strive for a stable (low) positive rate of inflation? This paper analyses why inflation may interact with downward nominal rigidities so as to imply inefficiencies in resource allocation at low rates of inflation. The higher the rate of inflation, the lower the likelihood that downward nominal rigidities are binding (the Tobin argument) and this may cause a non‐linear Phillips curve. Inflation can be too low in the sense that the employment level is reduced and its volatility increased.

Suggested Citation

  • Torben M. Andersen, 2001. "Can Inflation Be Too Low?," Kyklos, Wiley Blackwell, vol. 54(4), pages 591-602, November.
    • Handle: RePEc:bla:kyklos:v:54:y:2001:i:4:p:591-602
    DOI: 10.1111/1467-6435.00171
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    Cited by:

    1. Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-1466, June.
    2. Steinar Holden, 2005. "Wage Formation under Low Inflation," Springer Books, in: Hannu Piekkola & Kenneth Snellman (ed.), Collective Bargaining and Wage Formation, pages 39-57, Springer.
    3. Pierpaolo Benigno & Luca Antonio Ricci, 2008. "The Inflation-Unemployment Trade-Off at Low Inflation," NBER Working Papers 13986, National Bureau of Economic Research, Inc.

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