Is Inflation Too Low?
Inflation, as measured by the Consumer Price Index, seems to have settled at an annual rate of about 2 percent. Is that rate too low? In this article, William Poole, the president of the Federal Reserve Bank of St. Louis, states his belief that the Federal Reserve's target should be zero inflation, abstracting from measurement errors in the price indices. A zero rate would maximize the credibility of monetary policy and minimize distortions in the economy arising from uncertainty over the rate of inflation and from the tax code. One argument against zero inflation is that relative wages adjust more easily in an economy with a low, but positive, rate of inflation. This argument is not well supported in economic theory, and the evidence for it is weak. A second argument is that monetary policy may be ineffective at times because the nominal interest rate cannot fall below zero. This constraint is unlikely to be important in practice. The need for a negative real interest rate, which is possible only with positive inflation, will be much less at a zero rate of inflation because the economy will be more stable.
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Volume (Year): 18 (1999)
Issue (Month): 3 (Winter)
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