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Mitigate the impact of shocks on unemployment

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The statement is false. A positive average rate of inflation may have some benefits. There is less of a danger of hitting the zero lower bound for interest rates following a large negative shock, so less danger of a liquidity trap. Upward bias in the measurement of actual inflation may also justify a positive average inflation rate to achieve price stability in terms of the true underlying rate of inflation. In the presence of downward nominal wage rigidity, a positive inflation rate also permits some degree of real wage flexibility, and may thus mitigate the impact of shocks on unemployment.

Reference no: EM133043151

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