Welfare Cost of (Low) Inflation - a General Equilibrium Perspective

In view of the widely recognized costs of inflation, in terms of both its propensity to endanger macroeconomic stability in the short run and its possible harmful effects on growth in the longer term, reducing inflation has long been a top priority of most policy makers. Looking at recent global inflation experiences, it can arguably be said that, on the whole, substantial headway on this front has been made. In most industrialized countries, as well as in a large number of Asian...
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In view of the widely recognized costs of inflation, in terms of both its propensity to endanger macroeconomic stability in the short run and its possible harmful effects on growth in the longer term, reducing inflation has long been a top priority of most policy makers. Looking at recent global inflation experiences, it can arguably be said that, on the whole, substantial headway on this front has been made. In most industrialized countries, as well as in a large number of Asian countries (prior to the current crisis), inflation has dropped to below 5 percent. Even in many other developing economies, including Latin American countries, inflation has been brought down to low double-digit levels in recent years. If and when inflation in a country has reached a relatively low level, would it still be desirable for policy makers to vigorously pursue, or target, complete price stability as an ultimate policy goal?