Do We Know How Low Inflation Should Be?

37 Pages Posted: 5 Apr 2001

See all articles by Charles Wyplosz

Charles Wyplosz

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR)

Date Written: March 2001

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 of between 0.5% and 1%, and to decline quickly for higher rates 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.

Keywords: Inflation, natural rate of unemployment

JEL Classification: E30, E50

Suggested Citation

Wyplosz, Charles, Do We Know How Low Inflation Should Be? (March 2001). Available at SSRN: https://ssrn.com/abstract=264453

Charles Wyplosz (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5946 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://heiwww.unige.ch/~wyplosz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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