Zero Inflation and the Friedman Rule: A Welfare Comparison

FRB Richmond Economic Quarterly, Vol. 83, No. 4, Fall 1997, pp. 1-21

21 Pages Posted: 19 Nov 2012

Date Written: 1997

Abstract

According to standard monetary theory, optimal monetary policy involves slight deflation. Central banks, however, advocate zero inflation. Is there a significant welfare difference between zero inflation and optimal deflation? The answer hinges on the behavior of money demand at low nominal interest rates. Estimates of a general money demand function imply that there is not a significant difference: zero inflation yields roughly 90 percent of the total benefits to be gained by moving from 5 percent inflation to optimal deflation.

Suggested Citation

Wolman, Alexander L., Zero Inflation and the Friedman Rule: A Welfare Comparison (1997). FRB Richmond Economic Quarterly, Vol. 83, No. 4, Fall 1997, pp. 1-21. Available at SSRN: https://ssrn.com/abstract=2129814

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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