IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2815.html
   My bibliography  Save this paper

Should Nations Learn to Live With Inflation?

Author

Listed:
  • Stanley Fischer
  • Lawrence H. Summers

Abstract

It is often argued that the most important costs of inflation can be substantially mitigated by indexing reforms. Yet governments in moderate inflation countries have generally been very reluctant to promote institutional changes that would reduce the costs of inflation. Capital income continues to be taxed on a nominal basis, indexed bonds are a rarity, typical mortgage contracts keep nominal rather than real payments constant, and interest is not paid on required reserves. This paper examines the welfare consequences of inflation mitigation measures in the context of dynamic consistency theories of the determination of the inflation rate. Our general conclusion is that recognizing the effects of inflation mitigation measures on the choice of the inflation rate substantially undercuts the welfare case in their favor. It is easy to construct examples in which such measures actually reduce welfare. The case for indexing measures is strongest in settings where governments already have strong anti-inflation reputations, cannot precisely control the inflation rate, and can offset the effects of unanticipated inflation without reducing the costs of anticipated inflation. Conversely, the case for inflation mitigation measures is weakest where governments lack strong reputations, can control the inflation rate, and where indexing makes it easier to live with anticipated inflation.

Suggested Citation

  • Stanley Fischer & Lawrence H. Summers, 1989. "Should Nations Learn to Live With Inflation?," NBER Working Papers 2815, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2815
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2815.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ed Westerhout & Ona Ciocyte, 2017. "The role of inflation-linked bonds," CPB Discussion Paper 344, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June.
    3. Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, vol. 108(447), pages 363-382, March.
    4. Steven Holland, 1994. "Inflation and Wage Indexation in the Postwar U.S," Macroeconomics 9402001, EconWPA.
    5. Victor Zarnowitz, 1989. "Cost and Price Movements in Business Cycle Theories and Experience: Hypotheses of Sticky Wages and Prices (SEE ALSO WP3132-send out together)," NBER Working Papers 3131, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2815. 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: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.