Academic journal article Monthly Labor Review

The Optimal Inflation Rate

Academic journal article Monthly Labor Review

The Optimal Inflation Rate

Article excerpt

"What is the Optimal Inflation Rate?" ask Roberto M. Billi and George A. Kahn in a recent article in the Federal Reserve Bank of Kansas City's Economic Review. Billi and Kahn are certainly not the first people to ask this question, but they have made a rare attempt to answer it using quantitative analysis. Many central banks target specific rates of inflation; ideally, according to Billi and Kahn, the goal is to attain the level of inflation that maximizes the public's economic well-being. Inflation can be harmful to the economy because it generally hurts creditors, discourages saving, and increases tax burdens. It can also distort prices because most companies change prices infrequently.

Nevertheless, there are reasons to keep inflation above zero. First, maintaining some inflation decreases the possibility of deflation, which is generally considered by policymakers to be a more serious problem than inflation because it increases the real value of the money owed by debtors. Second, low inflation leads to low interest rates. When nominal interest rates reach zero--a phenomenon known as hitting the zero lower bound--conventional monetary policy no longer works. These two reasons constitute policymakers' primary rationale for targeting an inflation rate above zero. A third possible reason to aim for a positive inflation rate is that Billi and Kahn, among other economists, believe that most measures of inflation tend to overstate it. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.