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Low Inflation or Price Stability? A Look at the Issues

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  • Kenny, Geoff

    (Central Bank and Financial Services Authority of Ireland)

  • McGettigan, Donal

    (Central Bank and Financial Services Authority of Ireland)

Abstract

This paper examines whether monetary authorities should aim for low inflation or price stability. It first outlines and assesses many of the costs of inflation. Some of these, such as the distortionary effect upon the tax system, have been shown to involve significant welfare costs, even at very low inflation rates. When a variety of estimates of the transitional costs of moving to price stability are set against the permanent benefits of getting there, the evidence strongly favours the objective of stable prices. Some commentators argue, however, that there may be permanent costs associated with price stability, such as higher equilibrium rates of unemployment and less effective monetary policy. These arguments are not short of their critics, however, who suggest that such costs either do not exist, or are likely to be unimportant in practice. Overall, it is not possible, given the current state of economic knowledge, to arrive at a definite value for the optimal rate of inflation, although the evidence reviewed in this paper suggests that price stability may be optimal.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 3/RT/97.

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Length: 34 pages
Date of creation: Jun 1997
Date of revision:
Handle: RePEc:cbi:wpaper:3/rt/97

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  1. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 15(1), pages 5-41, January.
  2. Cooley, T.F. & Hansen, G.D., 1991. "The Welfare Costs of Moderate Inflations," Papers, Rochester, Business - General 90-04, Rochester, Business - General.
  3. Malcolm Edey & Norbert Funke & Mike Kennedy & Angel Palerm, 1995. "Monetary Policy at Price Stability: A Review of Some Issues," OECD Economics Department Working Papers 158, OECD Publishing.
  4. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
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  6. Selgin, George, 1995. "The case for a "productivity norm": Comment on Dowd," Journal of Macroeconomics, Elsevier, Elsevier, vol. 17(4), pages 733-740.
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  8. Dowd, Kevin, 1995. "Deflating the productivity norm," Journal of Macroeconomics, Elsevier, Elsevier, vol. 17(4), pages 717-732.
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  10. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, American Economic Association, vol. 79(2), pages 382-87, May.
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  12. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, National Bureau of Economic Research, Inc, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
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  15. Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD Publishing.
  16. Laurence Ball & David Romer, 1993. "Inflation and the Informativeness of Prices," NBER Working Papers 4267, National Bureau of Economic Research, Inc.
  17. Jeremy I. Bulow, 1982. "The Effect of Inflation on the Private Pension System," NBER Chapters, National Bureau of Economic Research, Inc, in: Inflation: Causes and Effects, pages 123-138 National Bureau of Economic Research, Inc.
  18. William B. English, 1996. "Inflation and financial sector size," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-16, Board of Governors of the Federal Reserve System (U.S.).
  19. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(3), pages 625-31, August.
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Cited by:
  1. Devine, Máiréad & McCoy, Daniel, 1997. "Inflation Targeting: A Review of the Issues," Research Technical Papers 5/RT/97, Central Bank of Ireland.

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