Nominal rigidities and the optimal rate of inflation

  • This paper analyses two reasons why inflation may interfere with price adjustment so as to create inefficiencies in resource allocation at low rates of inflation. The first argument is that the higher the rate of inflation the lower the likelihood that downward nominal rigidities are binding (the Tobin argument) which implies a non-linear Phillips-curve. The second argument is that low inflation strengthens nominal price rigidities and thus impairs the flexibility of the price system resulting in a less efficient resource allocation. It is argued that inflation can be too low from a welfare point of view due to the presence of nominal rigidities, but the quantitative importance is an open question.

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Author:Torben M. Andersen
Parent Title (German):Institut für Kapitalmarktforschung (Frankfurt am Main): CFS working paper series ; No. 1999,08
Series (Serial Number):CFS working paper series (1999, 08)
Publisher:Inst. für Kapitalmarktforschung
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:1999
Year of first Publication:1999
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:allocative efficiency; nominal rigidities; optimal rate of inflation
GND Keyword:Inflation Targeting; Preisstarrheit; Pareto-Optimum; Wohlfahrtseffekt
Page Number:27
Last Page:26
Paper prepared for the conference “Implementation of Price Stability”, Frankfurt, September 1998.
Source:CFS working paper ; 1999,08
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht