Thursday, April 23, 2009

costs of reducing inflation

When policymakers are more concerned with maintaining high levels of output and employment growth than with maintaining a low inflation rate, they may exert an inflationary bias on monetary policy. (Another possibility-not considered here- is that the fed may incorrectly estimate the growth rate of velocity over long periods of time, allowing an inflationary money supply growth.) Suppose that, whatever the cause, policymakers decide at some point that the economy is sustained inflation rate is too high. How to achieve disinflation (a decline in the long-run rate of inflation) and whether there are costs to the economy from reducing inflation are viewed differently in the new classical and new Keynesian approaches.

No comments: