Some people say that since inflation can be reduced in the...

Some people say that since inflation can be reduced in the long run without an increase in unemployment, we should reduce inflation to zero. Others believe that a steady rate of inflation at, say, 3 percent, should be our goal. What are the pros and cons of these two arguments? What, in your opinion, are good long-run goals for reducing inflation and unemployment?

Transcript

00:01 So this is a classic debate in the history of monetary economics.

00:03 Should your inflation target be zero or should your inflation target be positive, right? well, there are some pretty obvious ones here.

00:11 Zero minimizes transactions costs, right? that's very simple, right? the classic example is that when inflation happens, people need to reprint their menus, redo their signs, change their prices, engage in more time.

00:30 Looking for products and comparing products and acquiring information, right? so zero is appealing, right, in a way.

00:45 It reduces these basic transaction costs.

00:48 It lowers the cost of holding cash, which is valuable, right? inflation is a tax on people who choose to hold cash, and the people who choose hold cash might be, you know, poor.

01:03 They might be financially unsophisticated.

01:06 They might need to hold cash.

01:07 If someone just needs to hold cash to do their day -to -day business, to live day -to -day, should we be taxing them for that? is it reasonable to say you have a job which requires cash so you have to pay a higher tax rate? that seems kind of ridiculous to me, right? another really appealing goal of 0 % inflation is transparency, right? it is incredibly easy to communicate to the public and firms that 0 % inflation is a thing.

01:37 Saying that you are like in the current system, we've got 2 % inflation except sometimes we're going to let it vary above or below 2 % depending on economic conditions is very vague.

01:50 So there are some real benefits to just being able to communicate to the public and the firms that the inflation target is zero.

01:57 Positive.

01:58 A big one is labor market adjustment.

02:02 The economy is constantly changing, and that means that workers need to be reallocated between jobs, right? i mean, my great -grandfather built horse -drawn carriages, and nobody builds horse -drawn carriages anymore.

02:15 Over time, wages and prices need to adjust to encourage people to move out to industries, right? so you can lower real wages without, cutting nominal.

02:30 And this might make that process easier.

02:33 It keeps people happier.

02:38 People really hate being on the receiving end of nominal wage cuts...

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