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Is inflation too low?


  • William Poole


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.

Suggested Citation

  • William Poole, 1999. "Is inflation too low?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-10.
  • Handle: RePEc:fip:fedlrv:y:1999:i:jul:p:3-10:n:v.81no.4

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    References listed on IDEAS

    1. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Paper 9418, Federal Reserve Bank of Cleveland.
    2. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    3. James B. Bullard & Steven Russell, 2004. "How costly is sustained low inflation for the U.S. economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-68.
    4. Robert J. Barro, 1996. "Inflation and growth," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
    5. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters,in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
    6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    7. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
    8. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
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    Cited by:

    1. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
    2. Kuroda, Sachiko & Yamamoto, Isamu, 2005. "Wage Fluctuations in Japan after the Bursting of the Bubble Economy: Downward Nominal Wage Rigidity, Payroll, and the Unemployment Rate," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(2), pages 1-29, May.
    3. Kimura, Takeshi & Ueda, Kazuo, 2001. "Downward Nominal Wage Rigidity in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 15(1), pages 50-67, March.

    More about this item


    Inflation (Finance) ; Banks and banking; Central ; Monetary policy - United States;

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General


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