Low Inflation or Price Stability? A Look at the Issues
This paper examines whether monetary authorities should aim for low inflation or price stability. It first outlines and assesses many of the costs of inflation. Some of these, such as the distortionary effect upon the tax system, have been shown to involve significant welfare costs, even at very low inflation rates. When a variety of estimates of the transitional costs of moving to price stability are set against the permanent benefits of getting there, the evidence strongly favours the objective of stable prices. Some commentators argue, however, that there may be permanent costs associated with price stability, such as higher equilibrium rates of unemployment and less effective monetary policy. These arguments are not short of their critics, however, who suggest that such costs either do not exist, or are likely to be unimportant in practice. Overall, it is not possible, given the current state of economic knowledge, to arrive at a definite value for the optimal rate of inflation, although the evidence reviewed in this paper suggests that price stability may be optimal.
|Date of creation:||Jun 1997|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (01) 671 6666
Fax: (01) 671 6561
Web page: http://www.centralbank.ie
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
- William B. English, 1996. "Inflation and financial sector size," Finance and Economics Discussion Series 96-16, Board of Governors of the Federal Reserve System (U.S.).
- Jeremy I. Bulow, 1982. "The Effect of Inflation on the Private Pension System," NBER Chapters, in: Inflation: Causes and Effects, pages 123-138 National Bureau of Economic Research, Inc.
- Eijffinger, S. & De Hann, J., 1995.
"The Political Economy of Central Bank Independence,"
9587, Tilburg - Center for Economic Research.
- Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
- David Romer, 1991.
"Openness and inflation: theory and evidence,"
Federal Reserve Bank of San Francisco, issue Nov.
- Selgin, George, 1995. "The case for a "productivity norm": Comment on Dowd," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 733-740.
- Malcolm Edey & Norbert Funke & Mike Kennedy & Angel Palerm, 1995. "Monetary Policy at Price Stability: A Review of Some Issues," OECD Economics Department Working Papers 158, OECD Publishing.
- Thomas F. Cooley & Gary D. Hansen, 1991.
"The welfare costs of moderate inflations,"
Federal Reserve Bank of Cleveland, pages 483-518.
- Laidler, D., 1988.
"Taking Money Seriously,"
UWO Department of Economics Working Papers
8804, University of Western Ontario, Department of Economics.
- Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
- Robert J. Barro & Xavier Sala-i-Martin, 1990.
"World Real Interest Rates,"
NBER Working Papers
3317, National Bureau of Economic Research, Inc.
- Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
- Dowd, Kevin, 1995. "Deflating the productivity norm," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 717-732.
- Laidler, David E W & Parkin, J Michael, 1975. "Inflation: A Survey," Economic Journal, Royal Economic Society, vol. 85(340), pages 741-809, December.
- Ball, Laurence & Romer, David, 2003.
" Inflation and the Informativeness of Prices,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 35(2), pages 177-96, April.
- Ales Bulir & Anne Marie Gulde, 1995. "Inflation and Income Distribution; Further Evidenceon Empirical Links," IMF Working Papers 95/86, International Monetary Fund.
- Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD Publishing.
- 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.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
- Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:3/rt/97. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Smith)
If references are entirely missing, you can add them using this form.