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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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File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2002/2002sep65-3BrookKaragedikliScrimgeour.pdf
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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. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  2. Robert A. Buckle & John A. Carlson, 2000. "Inflation and Asymmetric Price Adjustment," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 157-160, February.
  3. 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.
  4. 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.
  5. 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.
  6. Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence Across States and Regions," Papers 629, Yale - Economic Growth Center.
  7. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  8. Javier Andrés & Ignacio Hernando, 1999. "Does Inflation Harm Economic Growth? Evidence from the OECD," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 315-348 National Bureau of Economic Research, Inc.
  9. 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.
  10. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," CEPR Discussion Papers 3892, C.E.P.R. Discussion Papers.
  11. 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.
  12. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March.
  13. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc.
  14. 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.
  15. Lawrence H. Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
  16. 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.
  17. 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.
  18. 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.
  19. Burdekin, Richard C.K. & Denzau, Arthur T. & Keil, Manfred W. & Sitthiyot, Thitithep & Willett, Thomas D., 2004. "When does inflation hurt economic growth? Different nonlinearities for different economies," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 519-532, September.
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