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Securing the Peace after a Truce in the War on Inflation

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  • Reinhart, Vincent-R

    (Federal Reserve Board)

Abstract

Central bankers in the major industrial economies have come close to securing the peace, or in some cases, have secured it in the battle against inflation, hostilities that lasted almost as long as the Cold War. It is important to remember that this battle has been a good fight: both the theory and the empirics reviewed in this paper support the central tenet of central banking that lower inflation supports faster economic growth. However, the observation that low inflation is associated with a macroeconomic benefit does not imply that disinflation should be pursued without limit. A particularly compelling argument in the body of work on the optimal inflation rate is the view that price deflation, or even very low inflation, may pose unacceptable macroeconomic risks given the lower bound of nominal interest rates of zero. Empirical work in this paper suggests that the zero bound is not an artifact of theoreticians but a palpable reality. That said, the perils of the zero bound to nominal interest rates may be seen as less threatening if a central bank is willing to be both aggressive in providing policy accommodation when the economy may be nearing the zero bound and flexible in using the available tools of policy.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 22 (2004)
Issue (Month): S1 (December)
Pages: 179-201

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Handle: RePEc:ime:imemes:v:22:y:2004:i:s1:p:179-201

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Cited by:
  1. Bank for International Settlements, 2010. "The international financial crisis and policy challenges in Asia and the Pacific," BIS Papers, Bank for International Settlements, number 52, 3.

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