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Low Inflation or Price Stability? A Look at the Issues

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Author Info

  • 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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References

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  1. Cooley, T.F. & Hansen, G.D., 1991. "The Welfare Costs of Moderate Inflations," Papers 90-04, Rochester, Business - General.
  2. Robert J. Barro & Xavier Sala-i-Martin, 1991. "World Real Interest Rates," NBER Working Papers 3317, National Bureau of Economic Research, Inc.
    • Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  3. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
  4. Laidler, David E W & Parkin, J Michael, 1975. "Inflation: A Survey," Economic Journal, Royal Economic Society, vol. 85(340), pages 741-809, December.
  5. 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.
  6. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
  7. Ales Bulir & Anne Marie Gulde, 1995. "Inflation and Income Distribution - Further Evidence on Empirical Links," IMF Working Papers 95/86, International Monetary Fund.
  8. William B. English, 1996. "Inflation and financial sector size," Finance and Economics Discussion Series 96-16, Board of Governors of the Federal Reserve System (U.S.).
  9. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
  10. David E. Laidler, 1988. "Taking Money Seriously," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 687-713, November.
  11. 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.
  12. Ball, Laurence & Romer, David, 2003. " Inflation and the Informativeness of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 177-96, April.
  13. Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD Publishing.
  14. Selgin, George, 1995. "The case for a "productivity norm": Comment on Dowd," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 733-740.
  15. Dowd, Kevin, 1995. "Deflating the productivity norm," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 717-732.
  16. Jeremy I. Bulow, 1982. "The Effect of Inflation on the Private Pension System," NBER Chapters, in: Inflation: Causes and Effects, pages 123-138 National Bureau of Economic Research, Inc.
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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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