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December 1997 Volume 3 Number 15 Inflation Goals: Guidance from the Labor Market?

By Erica L. Groshen and Mark E. Schweitzer

Abstract

As inflation rates in the United States decline, analysts are asking if there are economic reasons to hold the rates at levels above zero. A study of inflation’s effects on the labor market suggests that low rates of inflation do help the economy to adjust to changes in labor supply and demand. When inflation’s disruptive effects are balanced against this benefit, however, the labor market justification for pursuing a positive long-term inflation goal effectively disappears. In most countries, reducing inflation has been a key objective. Governments view inflation as a force that inhibits economic growth by discouraging long-term investment, distorting the tax structure, and undermining the financial plans of firms and households. Although this perception of inflation clearly predominates in policy circles, some analysts have argued that maintaining a certain amount of inflation over the long term can improve a country’s economic performance, largely by keeping unemployment in check

Year: 2011
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