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Do We Know How Low Inflation Should Be?

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  • Wyplosz, Charles

Abstract

The Paper looks for evidence of grease and sand effects in Europe, in particular the possibility that the natural rate of unemployment is affected by the inflation rate. Looking at four countries, France, Germany, the Netherlands and Switzerland, the Paper reports some preliminary evidence that the long-run rate of unemployment is a non-linear function of inflation. The particular shape of the empirical relationship supports the view that a moderate level of inflation provides some ‘grease’ to the price and wage setting process. In particular, the long-run rate of unemployment is found to reach a maximum of between 0.5% and 1%, and to decline quickly for higher rates of inflation. For the range of inflation rates observed in the sample countries, there is no evidence of sand effects, that uncertainty associated with inflation adversely affect the long-run rate of unemployment.

Suggested Citation

  • Wyplosz, Charles, 2001. "Do We Know How Low Inflation Should Be?," CEPR Discussion Papers 2722, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2722
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Natural Rate Of Unemployment;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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