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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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Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) 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, vol. 15(1), pages 5-41, January. [Downloadable!] (restricted)
  2. Aleš Bulir & Anne Marie Gulde, 1995. "Inflation and Income Distribution - Further Evidence on Empirical Links," IMF Working Papers 95/86, International Monetary Fund.
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  4. Barro, R.J. & Martin, X.S., 1990. "World Real Interest Rates," RCER Working Papers 227, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Cooley, Thomas F & Hansen, Gary D, 1991. "The Welfare Costs of Moderate Inflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 483-503, August. [Downloadable!] (restricted)
    Other versions:
  7. P?tscher, Benedikt M., 1990. "Comment," Econometric Theory, Cambridge University Press, vol. 6(02), pages 291-292, June. [Downloadable!]
  8. Dowd, Kevin, 1995. "Deflating the productivity norm," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 717-732. [Downloadable!] (restricted)
  9. Laidler, David E W & Parkin, J Michael, 1975. "Inflation: A Survey," Economic Journal, Royal Economic Society, vol. 85(340), pages 741-809, December. [Downloadable!] (restricted)
  10. David E. Laidler, 1988. "Taking Money Seriously," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 687-713, November. [Downloadable!] (restricted)
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  11. Laurence Ball & David Romer, 1993. "Inflation and the Informativeness of Prices," NBER Working Papers 4267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
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  13. 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.). [Downloadable!]
  14. 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. [Downloadable!]
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