On the Believable Benefits of Low Inflation

This paper reviews the existing theoretical and empirical literature addressing the benefits of low inflation. The ultimate goal is to arrive at a set of benefits in which a monetary authority can have genuine confidence. I argue that the current state of economic research—both empirical and theoretical—provides little basis for believing in significant observable benefits of low inflation such as an increase in the growth rate of real GDP. Moreover, what observable benefits do exist are unlikely to justify a policy of disinflation, even if the transitional costs of disinflation are quite moderate. I conclude that defending a policy of moderate disinflation requires more attention to be paid to the benefits of low inflation that are unobservable in familiar aggregate data. This naturally poses some policy challenges to central banks contemplating a disinflation.