Can Inflation Be Too Low?

Torben M. Andersen

Kyklos, 2001, vol. 54, issue 4, 591-602

Abstract: 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.

Date: 2001
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