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Deflating the case for zero inflation

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  • S. Rao Aiyagari

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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Bibliographic 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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Related research

Keywords: Inflation (Finance);

References

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  1. Charles I. Plosser, 1991. "Money and Business Cycles: A Real Business Cycle Interpretation," NBER Working Papers 3221, National Bureau of Economic Research, Inc.
  2. 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.
  3. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  4. 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.
  5. Robert J. Barro & Zvi Hercowitz, 1979. "Money Stock Revisions and Unanticipated Money Growth," NBER Working Papers 0329, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  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.
  9. 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.
  10. Ray C. Fair, 1978. "An Analysis of the Accuracy of Four Macroeconometric Models," Cowles Foundation Discussion Papers 492, Cowles Foundation for Research in Economics, Yale University.
  11. 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.
  12. 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.
  13. John F. Boschen & Herschel I. Grossman, 1983. "Tests of Equilibrium Macroeconomics Using Contemporaneous Monetary Data," NBER Working Papers 0558, National Bureau of Economic Research, Inc.
  14. Martin Feldstein & Lawrence Summers, 1983. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 116-152 National Bureau of Economic Research, Inc.
  15. Hercowitz, Zvi, 1982. "Money and price dispersion in the united states," Journal of Monetary Economics, Elsevier, vol. 10(1), pages 25-37, July.
  16. 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.
  17. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  18. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  19. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  20. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
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Citations

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Cited by:
  1. Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper 95-01, Federal Reserve Bank of Richmond.
  2. 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.
  3. CHARLES T. Carlstrom & WILLIAM T. Gavin, 1993. "Zero Inflation: Transition Costs And Shoe Leather Benefits," Contemporary Economic Policy, Western Economic Association International, vol. 11(1), pages 9-17, 01.
  4. 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.
  5. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
  6. S. Rao Aiyagari, 1991. "Response to a defense of zero inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 21-24.
  7. Balke, Nathan S. & Emery, Kenneth M., 1994. "The algebra of price stability," Journal of Macroeconomics, Elsevier, vol. 16(1), pages 77-97.
  8. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20.
  9. 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.
  10. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March.
  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.
  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.
  13. 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.

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