Essay on Inflation - 1908 Words

By the beginning of the 1980s, double-digit rates of inflation had become so pervasive among industrialized economies that they were viewed as a major deterrent to global economic growth. Since then, an explicit policy goal of low inflation has become a mantra for policymakers, and many countries, such as the U.K., New Zealand, Australia, Japan, Sweden, and the eleven countries under the European Central Bank (ECB), have enacted fundamental reforms to achieve that goal. Specifically, they have made their central banks more independent and thus insulated them from the temptations of inflationary finance; furthermore, in most of these cases, as well as in the U.S., central banks have practiced a greater degree of openness or transparency†¦show more content†¦While the Federal Reserve has no explicit inflation target, the U.S. inflation rate has averaged 3.0% since the end of the last recession in 1991.Q2. This Economic Letter addresses the question: How well is a 2% solution t o the inflation problem supported by the voluminous academic studies that have been conducted recently on the optimal rate of inflation? The Friedman Rule and the benefits of 0% inflation Milton Friedman (1969) described the optimal inflation rate as one that would not penalize households for holding monetary assets that bear no interest. This would require a zero nominal interest rate, such that the real return on money, which is the negative of the inflation rate, would exactly equal the real return on real assets. This so-called Friedman Rule has resurfaced in recent theoretical models. These models examine in an internally consistent manner how inflation leads to the inefficient use of the economy#56544;resources, and they quantify the significance of these inefficiencies by taking the models to the data. Using the Friedman Rule as a benchmark, the standard measure of welfare losses associated with inflation is computed to be the percent change in the household#56544;consumption (or income) flow that the household would require to be indifferent between two inflation rates. The majority of the large number of theoretical studies devoted to thisShow MoreRelatedThe Inflation And Inflation Prediction Essay2228 Words   |  9 Pagesof literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. 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