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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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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One Response to Optimal Inflation Rates – the Costs & Benefits of Inflation

  1. slim fast says:

    slim-fast.org Thanks for that awesome posting. It saved MUCH time :-)

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