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On the Believable Benefits of Low Inflation

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  • Ragan, Christopher

Abstract

This paper reviews the existing theoretical and empirical literature addressing the benefits of low inflation. The ultimate goal is to arrive at a set of benefits in which a monetary authority can have genuine confidence. I argue that the current state of economic research—both empirical and theoretical—provides little basis for believing in significant observable benefits of low inflation such as an increase in the growth rate of real GDP. Moreover, what observable benefits do exist are unlikely to justify a policy of disinflation, even if the transitional costs of disinflation are quite moderate. I conclude that defending a policy of moderate disinflation requires more attention to be paid to the benefits of low inflation that are unobservable in familiar aggregate data. This naturally poses some policy challenges to central banks contemplating a disinflation.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 98-15.

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Length: 45 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:bca:bocawp:98-15

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Keywords: Inflation: costs and benefits;

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References

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Citations

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Cited by:
  1. Pierre Fortin, 2013. "The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada," Cahiers de recherche 1309, CIRPEE.
  2. Klump, Rainer, 2003. "Inflation, factor substitution and growth," Working Paper Series 0280, European Central Bank.
  3. Christopher Ragan, 2011. "Precision Targeting: The Economics – and Politics – of Improving Canada’s Inflation-Targeting Framework," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 321, February.
  4. Osberg, L. & Sharpe, A., 1998. "An Index of Economic Well-being for Canada," Department of Economics at Dalhousie University working papers archive 98-08, Dalhousie, Department of Economics.
  5. Roderick Hill, 2000. "Real Income, Unemployment and Subjective Well-Being: Revisiting the Costs and Benefits of Inflation Reduction in Canada," Canadian Public Policy, University of Toronto Press, vol. 26(4), pages 399-414, December.
  6. Peter Funk & Bettina Kromen, 2006. "Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve," Working Paper Series in Economics 29, University of Cologne, Department of Economics.
  7. Peter Funk & Bettina Kromen, 2005. "Inflation and Innovation-driven Growth," Working Paper Series in Economics 16, University of Cologne, Department of Economics.
  8. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Working Papers 01-16, Bank of Canada.
  9. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2012. "How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation," Working Papers 2012-4, Brown University, Department of Economics.
  10. Yong Suk Lee, 2012. "Educational Tracking, Residential Sorting, and Intergenerational Mobility," Department of Economics Working Papers 2012-06, Department of Economics, Williams College.
  11. Paul Jenkins & Brian O'Reilly, 2001. "Monetary Policy and the Economic Well-being of Canadians," The Review of Economic Performance and Social Progress, in: Andrew Sharpe, Executive Director & France St-Hilaire, Vice-President , Research & Keith Banting, Di (ed.), The Review of Economic Performance and Social Progress 2001: The Longest Decade: Canada in the 1990s, volume 1 Centre for the Study of Living Standards & The Institutute for Research on Public Policy.
  12. Christopher Ragan, 2012. "Financial Stability: The Next Frontier for Canadian Monetary Policy," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 338, January.

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