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Deflating the case for zero inflation

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Author Info
S. Rao Aiyagari

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Abstract

This paper analyzes the U.S. congressional proposal to instruct the Federal Reserve to, in the next five years, lower inflation to zero from its current rate of around 5 percent. The paper concludes that, when other policy options are considered, the zero inflation policy is not advisable. Its benefits would be very small--possibly negative--while its costs would probably be significant. Other, more direct policy options could produce most of the same benefits with fewer costs. Among these alternative policies are deregulating interest rates on demand deposits, paying interest on financial institution reserves, lowering the federal tax rate on capital income, and indexing the federal tax code to inflation. ; Reprinted in Quarterly Review, v. 21, no. 3, Summer 1997.

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Publisher Info
Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1990)
Issue (Month): Sum ()
Pages: 2-11
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Handle: RePEc:fip:fedmqr:y:1990:i:sum:p:2-11:n:v.14no.3

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Keywords: Inflation (Finance);

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Finn Kydland & Edward C. Prescott, 1980. "A Competitive Theory of Fluctuations and the Feasibility and Desirability of Stabilization Policy," NBER Chapters, in: Rational Expectations and Economic Policy, pages 169-198 National Bureau of Economic Research, Inc. [Downloadable!]
  2. Hercowitz, Zvi, 1982. "Money and price dispersion in the united states," Journal of Monetary Economics, Elsevier, vol. 10(1), pages 25-37, July. [Downloadable!] (restricted)
    Other versions:
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  4. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January. [Downloadable!] (restricted)
  5. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February. [Downloadable!] (restricted)
  6. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  7. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April. [Downloadable!] (restricted)
  8. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  9. Plosser, C.I., 1989. "Money And Business Cycles A Real Business Cycle Interpretation," RCER Working Papers 210, University of Rochester - Center for Economic Research (RCER).
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  10. Boschen, John F. & Grossman, Herschel I., 1982. "Tests of equilibrium macroeconomics using contemporaneous monetary data," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 309-333. [Downloadable!] (restricted)
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  11. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  12. Martin Feldstein & Lawrence H. Summers, 1980. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Working Papers 0312, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Chamley, Christophe, 1985. "Efficient Taxation in a Stylized Model of Intertemporal General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 451-68, June. [Downloadable!] (restricted)
  14. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
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  15. Barro, Robert J. & Hercowitz, Zvi, 1980. "Money stock revisions and unanticipated money growth," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 257-267, April. [Downloadable!] (restricted)
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  16. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  17. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  18. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  19. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September. [Downloadable!] (restricted)
  20. Fair, Ray C, 1979. "An Analysis of the Accuracy of Four Macroeconometric Models," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 701-18, August. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 5, European Central Bank. [Downloadable!]
    Other versions:
  2. S. Rao Aiyagari, 1991. "Response to a defense of zero inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 21-24. [Downloadable!]
  3. Daniel L. Thornton, 1996. "The costs and benefits of price stability: an assessment of Howitt's rule," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 23-38. [Downloadable!]
  4. Irasema Alonso, 1991. "Patterns of Exchange, Fiat Money, and the Welfare Costs of Inflation," Economics Working Papers 63, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1993. [Downloadable!]
  5. Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper 95-01, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  6. Nathan S. Balke & Kenneth M. Emery, 1991. "The algebra of price stability," Research Paper 9117, Federal Reserve Bank of Dallas. [Downloadable!]
    Other versions:
  7. Charles T. Carlstrom & William T. Gavin, 1991. "Zero inflation: transition costs and shoe-leather benefits," Working Paper 9113, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  8. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March. [Downloadable!]
  9. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20. [Downloadable!]
  10. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada. [Downloadable!]
  11. Tom Cargill & Federico Guerrero, 2006. "A Reassessment of the Problems with Interest Targeting: What Have We Learned from Japanese Monetary Policy?," Working Papers 06-010, University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics. [Downloadable!]
  12. W. Lee Hoskins & Mark S. Sniderman, 1992. "Price Stability: The Policy and Research Perspectives," Eastern Economic Journal, Eastern Economic Association, vol. 18(1), pages 55-63, Winter. [Downloadable!]
  13. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics. [Downloadable!]
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