Optimal Inflation Rates - the Costs & Benefits of Inflation

I’m giving a lecture today on inflation to prep Econ 191 students for Yuriy Gorodnichenko‘s paper (ungated) on Optimal Inflation Rates next week.

I compiled a list of some costs and benefits of inflation from a few sources: an old Larry Summers article, David Romer’s Short Run Fluctuations, and a Brookings paper by John Williams on the Zero Lower Bound.

Costs

1. Standards: Standards should remain standard (LHS)
2. Stability, Uncertainty & Relative Price Variability (LHS, Romer et al)
3. Tax System: Indexing issues & magnified distortions (Feldstein)
4. Utility loss: People don’t like it (Romer, Shiller)

Benefits

1. Grease the Wheels (LHS, cited in Romer)
2. “Greece” the Wheels: Wage rebalancing in Eurozone and Reduced Real Debt Burdens (Eichengreen)
3. Credibility (LHS)
4. Avoid ZLB (Williams)

See the lecture for descriptions & explanations of each (starting on slide 28). Finally, some historical context:

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