Relevant Economic Issues Concerning the Optimal Rate of Inflation

46 Pages Posted: 20 Jan 2004

See all articles by Diego Rodriguez-Palenzuela

Diego Rodriguez-Palenzuela

European Central Bank (ECB)

Gonzalo Camba-Mendez

European Central Bank (ECB)

Juan A. Garcia

European Central Bank (ECB)

Date Written: September 2003

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.

Keywords: Price stability, inflation costs and benefits, downward nominal rigidities, inflation differentials, deflation

JEL Classification: D60, E31, E41, E61, H21

Suggested Citation

Rodriguez-Palenzuela, Diego and Camba-Mendez, Gonzalo and Garcia, Juan Angel, Relevant Economic Issues Concerning the Optimal Rate of Inflation (September 2003). Available at SSRN: https://ssrn.com/abstract=487418

Diego Rodriguez-Palenzuela (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
(49) 69-1344-6480 (Phone)
(49) 69-1344-6575 (Fax) (Fax)

Gonzalo Camba-Mendez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Juan Angel Garcia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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