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The Case for Positive Low Inflation: Some Financial Market Considerations with Special Attention to the Problems of Japan

Author

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  • Thomas I. Palley

    () (AFL-CIO)

Abstract

The 1970s witnessed a backlash against inflation. However, Japan's prolonged stagnation and the global economy's recent flirtation with deflation have revived the case for low inflation. Low inflation acts as grease in labor markets, helping the process of adjustment and lowering equilibrium unemployment. It also has beneficial effects on financial markets. There is a "disequilibrium" role for inflation in reducing debt burdens resulting from asset price bubbles. There is also an "equilibrium" role. Low inflation helps avoid the trap of nominal interest rate floors and creates room to reduce real interest rates in recessions. It also reduces the real cost of capital by inducing portfolio substitution away from money, and by lowering the bankruptcy risk associated with deflation.

Suggested Citation

  • Thomas I. Palley, 2000. "The Case for Positive Low Inflation: Some Financial Market Considerations with Special Attention to the Problems of Japan," Eastern Economic Journal, Eastern Economic Association, vol. 26(3), pages 277-295, Summer.
  • Handle: RePEc:eej:eeconj:v:26:y:2000:i:3:p:277-295
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume26/V26N3P277_295.pdf
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    Citations

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    Cited by:

    1. Joerg Bibow, 2004. "Fiscal Consolidation Contrasting Strategies & Lessons from International Experience," Macroeconomics 0402014, EconWPA.
    2. Alfonso Palacio Vera, 2009. "Some Reflections on the Theory of the “Liquidity Trap”," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 09-02, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    3. Peter Docherty, 2006. "Endogenous Money, Non-neutrality and Interest-sensitivity in the Theory of Long Period Unemployment," Working Paper Series 148, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

    More about this item

    Keywords

    Deflation; Inflation; Prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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