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The Unbearable Lightness of Zero-Inflation Optimism


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Canadian policymakers currently adhere to the view that the benefits of establishing and maintaining price stability (near-zero inflation) are "many and large" and that the costs are "small and temporary". This paper, in contrast, warns about the lightness of zero-inflation optimism. Evidence across industrial counties and over time for Canada is first shown to contain no compelling proof that the macroeconomic benefits from inflation reduction are large. Recent Canadian and U.S. macroeconomic evidence is then reported to be consistent with a strong influence of the path of actual unemployment on the level of natural unemployment. The costs of recession-induced disinflation could therefore be much higher than previously thought. Unfortunately, the prospects of reconciling the objectives of price stability and full employment in Canada do not look promising. Les responsables de la politique économique au Canada sont présentement d'avis que les avantages de la stabilité globale des prix sont "nombreux et importants" et les coûts de porter et de maintenir le taux d'inflation à un niveau presque nul sont "faibles et temporaires". La présente étude met en garde contre la légèreté d'un tel optimisme. Tout d'abord, les données transversales pour les pays industriels et les données chronologiques pour le Canada ne contiennent aucune preuve convaincante que les avantages macroéconomiques d'une réduction de l'inflation soient importants. De plus, les données macroéconomiques récentes pour le Canada et les Etats-Unis ouvrent la possibilité que le taux de chômage observé exerce une importante influence sur le niveau du chômage naturel. La désinflation induite par une récession pourrait donc coûter beaucoup plus cher qu'on a cru jusqu'ici. Malheureusement, les perspectives de réconciliation entre les objectifs de stabilité des prix et de plein emploi au Canada paraissent guère reluisantes.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 15.

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Length: 28
Date of creation: Jun 1993
Date of revision:
Handle: RePEc:cre:crefwp:15

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Keywords: low inflatio; monetary policy; Canada;

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Cited by:
  1. Robert Mcmurtry & Adalsteinn Brown, 1997. "The Bank Of Canada As A Determinant Of Health," Social Indicators Research, Springer, vol. 40(1), pages 179-187, January.
  2. Mary Bange & William Bernhard & Jim Granato & Lauren Jones, 1997. "The effect of inflation on the natural rate of output: experimental evidence," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1191-1199.
  3. Fortin, Pierre, 1994. "Les récessions font-elles progresser l’économie?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 70(3), pages 291-297, septembre.
  4. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada.
  5. Mahadevan, Renuka & Asafu-Adjaye, John, 2005. "The productivity-inflation nexus: the case of the Australian mining sector," Energy Economics, Elsevier, vol. 27(1), pages 209-224, January.
  6. David R. Johnson & Sebastian Gerlich, 2002. "How Has Inflation Changed in Canada? A Comparison of 1989­2001 to 1964­1988," Canadian Public Policy, University of Toronto Press, vol. 28(4), pages 563-579, December.
  7. Ardeshir Sepehri & Saeed Moshiri, 2004. "Inflation-Growth Profiles Across Countries: Evidence from Developing and Developed Countries," International Review of Applied Economics, Taylor & Francis Journals, vol. 18(2), pages 191-207.


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