Relevant economic issues concerning the optimal rate of inflation

Gonzalo Camba-Mendez, Garcí­a, Juan Angel and Diego Rodriguez-Palenzuela

No 278, Working Paper Series from European Central Bank

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

Keywords: deflation; downward nominal rigidities; inflation costs and benefits; inflation differentials; price stability (search for similar items in EconPapers)
Date: 2003-09
Note: 54288
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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