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An optimal inflation target for New Zealand: lessons from the literature

  • Anne-Marie Brook
  • Özer Karagedikli
  • Dean Scrimgeour

    (Reserve Bank of New Zealand)

In this article we summarise the recent economic literature on the relationship between inflation and growth, to assess what inflation target might be most consistent with the fastest pace of sustainable economic growth. One conclusion is that the relationship between inflation and growth seems to be different at different rates of inflation. At very low rates of inflation, including the 0 - 3 per cent range, the growth rate seems to be independent of the inflation rate. But at higher rates of inflation, there is evidence that inflation does significant damage to growth. There is some theoretical literature which cautions central banks against deflation, and therefore against including zero in an inflation target range. As yet there is little data available with which to test this presumption. Based on the theoretical arguments, we conclude that the risks of New Zealand being caught in a deflationary trap are low. Overall, we conclude that average rates of inflation in New Zealand have been within the `optimal inflation range' suggested by the literature. Interested readers may wish to consult a longer and more comprehensive version of this paper, contained in the Bank's publication on PTA related issues.

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Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

Volume (Year): 65 (2002)
Issue (Month): (September)
Pages:

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Handle: RePEc:nzb:nzbbul:september2002:1
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  1. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers.
  3. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series 0231, European Central Bank.
  4. 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(1), pages 1-60.
  5. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March.
  6. Levine, Ross & Zervos, Sara J, 1993. "What We Have Learned about Policy and Growth from Cross-Country Regressions?," American Economic Review, American Economic Association, vol. 83(2), pages 426-30, May.
  7. Buckle, R-A & Carlson, J-A, 1996. "Inflation an Asymmetric Price Adjustment," Papers 96-013, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  8. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  9. Jacqueline Dwyer, 2003. "Nominal Wage Rigidity in Australia," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 6(1), pages 5-24, March.
  10. Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence Across States and Regions," Papers 629, Yale - Economic Growth Center.
  11. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
  12. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
  13. Richard C.K. Burdekin & Arthur T. Denzau & Manfred W. Keil & Thitithep Sitthiyot & Thomas D. Willett, . "When Does Inflation Hurt Economic Growth? Different Nonlinearities for Different Economies," Claremont Colleges Working Papers 2000-22, Claremont Colleges.
  14. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  15. Javier Andres & Ignacio Hernando, 1997. "Does Inflation Harm Economic Growth? Evidence for the OECD," NBER Working Papers 6062, National Bureau of Economic Research, Inc.
  16. Leo Bonato, 1999. "Price stability: Some costs and benefits in New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 33(1), pages 27-49.
  17. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122 National Bureau of Economic Research, Inc.
  18. Lawrence Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
  19. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September.
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