Must-Read: Nick Bunker: Why Slightly higher Inflation Might Be a Benefit

Must-Read: A somewhat puzzling finding by Nakamura et al. that higher inflation–at least in the sub-10%/year environment of the post-WWII United States–does not degrade the functioning of the price system by increasing the spread of real prices. If this holds up, then the only remaining cost of steady, moderate inflation is having to change your prices more frequently. And even though are models tend to say that should be a heavy burden, I find that very unlikely: whatever the reason for fixed, posted prices is, I cannot see it having the implication that it is costly to change them to compensate for ongoing inflation once a year rather than once every three to five years.

Nick Bunker: Why Slightly higher Inflation Might Be a Benefit:

The U.S. Federal Reserve Board hasn’t hit its stated inflation target of two percent in more than four years….

With the central bank’s benchmark Federal Funds interest rate at close to zero, perhaps it’s time to rethink that target rate. Why not aim for a higher inflation rate of, say, 4 percent, which would allow inflation-adjusted interest rates to go even further below zero  to help boost economic growth during a possible future downturn?… Emi Nakamura [et al.]… built a brand new dataset on inflation before tackling a very important question on the costs of inflation….

Nakamura [et al.]… find… that the absolute price changes don’t vary that much regardless of the inflation rate. This means it doesn’t look like higher rates of inflation cause more price dispersion…. [Instead,] price hikes happen more frequently when inflation is higher, which gives more credence to “menu-cost” models of price setting…

August 17, 2016


Brad DeLong
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