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Can Inflation Be Too Low?
Author(s) -
Andersen Torben M.
Publication year - 2001
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/1467-6435.00171
Subject(s) - economics , inflation (cosmology) , monetary policy , volatility (finance) , monetary economics , real interest rate , keynesian economics , phillips curve , economic stability , nominal interest rate , inflation targeting , argument (complex analysis) , price of stability , inflation rate , econometrics , endocrinology , medicine , physics , theoretical physics
Price stability has become the predominant goal for monetary policy. Should the aim be zero inflation or could inflation be too low making it better to strive for a stable (low) positive rate of inflation? This paper analyses why inflation may interact with downward nominal rigidities so as to imply inefficiencies in resource allocation at low rates of inflation. The higher the rate of inflation, the lower the likelihood that downward nominal rigidities are binding (the Tobin argument) and this may cause a non‐linear Phillips curve. Inflation can be too low in the sense that the employment level is reduced and its volatility increased.