Do we know how low inflation should be?

Charles Wyplosz

No 06-2001, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: The paper looks for evidence of grease and sand effects in Europe, in particular the possibility that the natural rate of unemployment is affected run by the inflation rate. Looking at four countries, France, Germany, the Netherlands and Switzerland, the paper reports some preliminary evidence that the long-run rate of unemployment is a nonlinear function of inflation. The particular shape of the empirical relationship supports the view that a moderate level of inflation provides some "grease" to the price and wage setting process. In particular, the long-run rate of unemployment is found to reach a maximum between 0.5% and 1%, and to quickly decline for higher rate of inflation. For the range of inflation rates observed in the sample countries, there is no evidence of sand effects, that uncertainty associated with inflation adversely affect the long-run rate of unemployment.

Pages: 33 pages
Date: 2001-01-11
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (51)

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Working Paper: Do We Know How Low Inflation Should Be? (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:gii:giihei:heiwp06-2001

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