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Relevant economic issues concerning the optimal rate of inflation

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  • Camba-Méndez, Gonzalo
  • Garcí­a, Juan Angel
  • Rodriguez-Palenzuela, Diego

Abstract

This paper reviews the key economic issues concerning the welfare costs of inflation and deflation, with a view to shedding light on the desirable properties of the inflation process. Our review of the evidence on the overall costs of inflation and deflation indicates that such costs could be even higher than previously thought, also at moderate rates of inflation, thereby strengthening the case for price stability. We also review two of the arguments usually invoked for maintaining a small positive rate of inflation: the potential alleviation of poor economic performance arising from downward nominal rigidities and the role of sustained inflation differentials within the euro area. Recent evidence suggests that the macroeconomic relevance of these two factors is minor, even when considered in combination, although this assessment remains surrounded by high uncertainty. JEL Classification: D60, E31, E41, E61, H21

Suggested Citation

  • Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2003278
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    Cited by:

    1. Issing, Otmar, 2005. "The ECB and the euro--the first 6 years: A view from the ECB," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 405-420, June.
    2. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    3. Pavel Gertler & Matúš Senaj, 2010. "Downward Wage Rigidities in Slovakia," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 4(1), pages 079-101, March.
    4. Knoppik, Christoph, 2007. "The kernel-location approach: A new non-parametric approach to the analysis of downward nominal wage rigidity in micro data," Economics Letters, Elsevier, vol. 97(3), pages 253-259, December.
    5. Holden, Steinar, 2004. "Wage formation under low inflation," Memorandum 09/2004, Oslo University, Department of Economics.
    6. Jesús Crespo Cuaresma & Maria Silgoner, 2014. "Economic Growth and Inflation in Europe: A Tale of Two Thresholds," Journal of Common Market Studies, Wiley Blackwell, vol. 52(4), pages 843-860, July.
    7. Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, April.
    8. Christoph Knoppik & Thomas Beissinger, 2009. "Downward nominal wage rigidity in Europe: an analysis of European micro data from the ECHP 1994–2001," Empirical Economics, Springer, vol. 36(2), pages 321-338, May.
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    More about this item

    Keywords

    deflation; downward nominal rigidities; inflation costs and benefits; inflation differentials; price stability;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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