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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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    Citations

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    Cited by:

    1. Holden Steinar & Wulfsberg Fredrik, 2008. "Downward Nominal Wage Rigidity in the OECD," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-50, April.
    2. Pierpaolo Benigno & Luca Antonio Ricci, 2008. "The Inflation-Unemployment Trade-Off at Low Inflation," NBER Working Papers 13986, National Bureau of Economic Research, Inc.
    3. David Fielding & Paul Mizen, 2008. "Evidence on the Functional Relationship between Relative Price Variability and Inflation with Implications for Monetary Policy," Economica, London School of Economics and Political Science, vol. 75(300), pages 683-699, November.
    4. Jérôme Creel & Éloi Laurent & Jacques Le Cacheux, 2007. "Politiques et performances macroéconomiques de la zone euro. Institutions, incitations, stratégies," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 249-281.
    5. Holden Steinar & Wulfsberg Fredrik, 2008. "Downward Nominal Wage Rigidity in the OECD," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-50, April.
    6. Feldmann, Horst, 2012. "Banking deregulation around the world, 1970s to 2000s: The impact on unemployment," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 26-42.
    7. Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-1466, June.
    8. Ana María Loboguerrero & Ugo Panizza, 2003. "Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease," IDB Publications (Working Papers) 1478, Inter-American Development Bank.
    9. Gilbert Cette & Christian Pfister, 2003. "The challenges of the "new economy" for monetary policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 213-233 Bank for International Settlements.
    10. Linzert, Tobias, 2005. "The Unemployment Inflation Trade-Off in the Euro Area," IZA Discussion Papers 1699, Institute for the Study of Labor (IZA).
    11. International Monetary Fund, 2005. "Inflation Targeting and Output Growth; Empirical Evidence for the European Union," IMF Working Papers 05/89, International Monetary Fund.
    12. von Hagen, Jurgen & Hofmann, Boris, 2004. "Macroeconomic implications of low inflation in the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 5-23, March.
    13. Ana Maria Loboguerrero & Ugo Panizza, 2003. "Inflación y flexibilidad del mercado laboral: La rueda que chilla es la que se engrasa," Research Department Publications 4348, Inter-American Development Bank, Research Department.
    14. Feldmann, Horst, 2015. "Banking system concentration and unemployment in developing countries," Journal of Economics and Business, Elsevier, vol. 77(C), pages 60-78.
    15. Petra Gerlach-Kristen, 2007. "A Two-Pillar Phillips Curve for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(IV), pages 425-448, December.
    16. Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe," Working Paper 2004/5, Norges Bank.
    17. Feldmann, Horst, 2009. "The unemployment effects of labor regulation around the world," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 76-90, March.
    18. repec:spo:wpecon:info:hdl:2441/2139 is not listed on IDEAS
    19. Fagan, Gabriel & Messina, Julián, 2009. "Downward wage rigidity and optimal steady-state inflation," Working Paper Series 1048, European Central Bank.

    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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