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An optimal inflation target for New Zealand: lessons from the literature

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Author Info
Anne-Marie Brook
Özer Karagedikli
Dean Scrimgeour (Reserve Bank of New Zealand)

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Abstract

In this article we summarise the recent economic literature on the relationship between inflation and growth, to assess what inflation target might be most consistent with the fastest pace of sustainable economic growth. One conclusion is that the relationship between inflation and growth seems to be different at different rates of inflation. At very low rates of inflation, including the 0 - 3 per cent range, the growth rate seems to be independent of the inflation rate. But at higher rates of inflation, there is evidence that inflation does significant damage to growth. There is some theoretical literature which cautions central banks against deflation, and therefore against including zero in an inflation target range. As yet there is little data available with which to test this presumption. Based on the theoretical arguments, we conclude that the risks of New Zealand being caught in a deflationary trap are low. Overall, we conclude that average rates of inflation in New Zealand have been within the `optimal inflation range' suggested by the literature. Interested readers may wish to consult a longer and more comprehensive version of this paper, contained in the Bank's publication on PTA related issues.

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Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

Volume (Year): 65 (2002)
Issue (Month): (September)
Pages:
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Handle: RePEc:nzb:nzbbul:september2002:1

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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. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September. [Downloadable!]
  2. 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)
  3. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Leo Bonato, 1998. "Price stability: some costs and benefits in New Zealand," Reserve Bank of New Zealand Discussion Paper Series G98/10, Reserve Bank of New Zealand. [Downloadable!]
  5. Buckle, R-A & Carlson, J-A, 1996. "Inflation an Asymmetric Price Adjustment," Papers 96-013, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  6. Levine, Ross & Zervos, Sara J, 1993. "What We Have Learned about Policy and Growth from Cross-Country Regressions?," American Economic Review, American Economic Association, vol. 83(2), pages 426-30, May. [Downloadable!] (restricted)
  7. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March. [Downloadable!]
  10. Günter Coenen & Athanasios Orphanides & Volker Wieland, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series 231, European Central Bank. [Downloadable!]
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  11. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc. [Downloadable!]
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  12. Lawrence Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
  13. Javier Andres & Ignacio Hernando, 1997. "Does Inflation Harm Economic Growth? Evidence for the OECD," NBER Working Papers 6062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. repec:pal:imfstp:v:48:y:2001:i:1:p:1 is not listed on IDEAS
  15. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence Across States and Regions," Papers 629, Yale - Economic Growth Center.
    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. Christie Smith, 2004. "The long-run effects of monetary policy on output growth," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, September. [Downloadable!]
  2. Nicoletta Batini & Douglas Laxton, 2006. "Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets," Working Papers Central Bank of Chile 406, Central Bank of Chile. [Downloadable!]
  3. Réka Juhász, 2008. "The optimal rate of inflation and the inflation target: international experience and the Hungarian perspective," MNB Bulletin, Magyar Nemzeti Bank (The Central Bank of Hungary), vol. 3(2), pages 30-37, September. [Downloadable!]
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