Do we know how low inflation should be?

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Do we know how low inflation should be?

Author Info

Charles Wyplosz () (The Graduate Institute of International Studies)

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Charles Wyplosz

Abstract

The paper looks for evidence of grease and sand effects in Europe, in particular the possibility that the natural rate of unemployment is affected run by the inflation rate. Looking at four countries, France, Germany, the Netherlands and Switzerland, the paper reports some preliminary evidence that the long-run rate of unemployment is a nonlinear function of inflation. The particular shape of the empirical relationship supports the view that a moderate level of inflation provides some "grease" to the price and wage setting process. In particular, the long-run rate of unemployment is found to reach a maximum between 0.5% and 1%, and to quickly decline for higher rate of inflation. For the range of inflation rates observed in the sample countries, there is no evidence of sand effects, that uncertainty associated with inflation adversely affect the long-run rate of unemployment.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number 06-2001.

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Length: 33 pages
Date of creation: 11 Jan 2001
Date of revision:
Handle: RePEc:gii:giihei:heiwp06-2001

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Paper
- Wyplosz, Charles, 2001. "Do We Know How Low Inflation Should Be?," CEPR Discussion Papers 2722, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

This paper has been announced in the following NEP Reports:

NEP-ALL-2001-11-21 (All new papers)
NEP-CBA-2001-11-21 (Central Banking)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
Other versions:
- Lars E. O. Svensson, 1996. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," NBER Working Papers 5719, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Svensson, Lars E.O., 1997. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," Seminar Papers 614, Stockholm University, Institute for International Economic Studies. [Downloadable!]
Debelle, Guy & Vickery, James, 1998. "Is the Phillips Curve a Curve? Some Evidence and Implications for Australia," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 384-98, December.
Other versions:
- Guy Debelle & James Vickery, 1997. "Is the Phillips Curve a Curve? Some Evidence and Implications for Australia," RBA Research Discussion Papers rdp9706, Reserve Bank of Australia. [Downloadable!]
David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- David Card & Dean Hyslop, 1995. "Does Inflation 'Grease the Wheels of the Labor Market'?," Working Papers 735, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 7-34. [Downloadable!]
George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-1), pages 1-76. [Downloadable!]
Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying Inflation's Grease and Sand Effects in the Labor Market," NBER Working Papers 6061, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflation's grease and sand effects in the labor market," Staff Reports 31, Federal Reserve Bank of New York. [Downloadable!]
- Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflations grease and sand effects in the labor market," Working Paper 9705, Federal Reserve Bank of Cleveland. [Downloadable!]
Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 297-346. [Downloadable!]
Wyplosz, Charles, 1999. "Financial Restraints and Liberalization in Postwar Europe," CEPR Discussion Papers 2253, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2000-1), pages 1-60. [Downloadable!]
David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers rdp1999-01, Reserve Bank of Australia. [Downloadable!]
Other versions:
- Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999. "The Phillips curve in Australia," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 223-258, October. [Downloadable!] (restricted)
Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1.
Other versions:
- Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1.
Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March. [Downloadable!] (restricted)
Blanchard, Olivier & Katz, Lawrence F, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter. [Downloadable!] (restricted)
Other versions:
- Blanchard, O & Katz, L, 1996. "What We Know and Do Not Know about the Natural Rate of Unemployment," Working papers 96-29, Massachusetts Institute of Technology (MIT), Department of Economics.
- Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May. [Downloadable!] (restricted)
Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR, CES, MSH, vol. 16(32), pages 83-126, 04. [Downloadable!] (restricted)
Michael Bruno & William Easterly, 1996. "Inflation and growth: in search of a stable relationship," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 139-146. [Downloadable!]

Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Other versions:
- Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe," Working Paper 2004/5, Norges Bank. [Downloadable!]
- Holden, Steinar & Wulfsberg, Fredrik, 2004. "Downward Nominal Wage Rigidity in Europe," Memorandum 08/2004, Oslo University, Department of Economics. [Downloadable!]
Ana Maria Loboguerrero & Ugo Panizza, 2003. "Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease," RES Working Papers 4347, Inter-American Development Bank, Research Department. [Downloadable!]
Other versions:
- Loboguerrero, Ana Maria & Panizza, Ugo, 2006. "Inflation and labor market flexibility: The squeaky wheel gets the grease," P.O.L.I.S. department's Working Papers 63, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
- Ugo Panizza & Ana Maria Loboguerrero, 2004. "Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease," Econometric Society 2004 Latin American Meetings 3, Econometric Society. [Downloadable!]
Petra Gerlach, 2007. "A Two-Pillar Phillips Curve for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(IV), pages 425-448, December. [Downloadable!]
Tobias Linzert, 2005. "The Unemployment Inflation Trade-Off in the Euro Area," IZA Discussion Papers 1699, Institute for the Study of Labor (IZA). [Downloadable!]
Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanasios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Empirical Evidence for the European Union," IMF Working Papers 05/89, International Monetary Fund. [Downloadable!]
Pierpaolo Benigno & Luca Antonio Ricci, 2009. "The Inflation-Unemployment Trade-off at Low Inflation," IMF Working Papers 09/34, International Monetary Fund. [Downloadable!]
Other versions:
- Pierpaolo Benigno & Luca Antonio Ricci, 2008. "The Inflation-Unemployment Trade-Off at Low Inflation," NBER Working Papers 13986, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
repec:bep:maccon:v:6:y:2006:i:1:p:1450-1450 is not listed on IDEAS
Steinar Holden & Fredrik Wulfsberg, 2007. "Downward Nominal Wage Rigidity in the OECD," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Other versions:
- Holden, Steinar & Wulfsberg, Fredrik, 2005. "Downward Nominal Wage Rigidity in the OECD," Memorandum 10/2005, Oslo University, Department of Economics. [Downloadable!]
- Steinar Holden & Fredrik Wulfsberg, 2007. "Downward nominal wage rigidity in the OECD," Working Paper Series 777, European Central Bank. [Downloadable!]
Ana Maria Loboguerrero & Ugo Panizza, 2003. "Inflación y flexibilidad del mercado laboral: La rueda que chilla es la que se engrasa," RES Working Papers 4348, Inter-American Development Bank, Research Department. [Downloadable!]
repec:bep:macadv:v:8:y:2008:i:1:p:1651-1651 is not listed on IDEAS

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