Why The Central Bank Should Not Aim For Zero Inflation

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Cause-And-Effect-Of-Inflation      Inflation is a conundrum that many economists and financial analysts are still trying to solve. While some say that price inflation is caused by monetary inflation, others insist that money inflation is caused by price inflation. More..


Why The Central Bank Should Not Aim For Zero Inflation ?  

In the last few decades we have seen that hyper inflation has been affecting almost all developing countries. Even the developed countries in the world have been fighting on and off with high inflation, especially after World War II.

 

All countries have had varying degrees of success when combating inflation and bring the prices down to acceptable levels. Generally speaking the central bank should not aim for zero inflation. Few countries are trying to achieve zero inflation by adopting price stability. However, lessons from the past have shown us achieving zero inflation is quite contentious. This means that there is no universally accepted solution to fight inflation and therefore, it will be impossible for the central bank to aim for zero inflation.

Zero inflation usually refers to inflation rate slightly above zero. In the true sense, the inflation rate is not zero. The central bank should not aim for zero inflation because the real interest rates and nominal interest rates will also be close to zero. Since costs of holding cash are minimal, the central bank cannot afford to push nominal interest rates to below zero.

If the central bank does target zero inflation, it will be unable to ease the monetary policy in response to any recession shocks. If the nation gives in to zero inflation, it will have a very difficult time coming out of it and it is best avoid the dangers of zero inflation. This is the main reason why the central bank should not aim for zero inflation. It is better to target for a low positive rate of inflation as there will be room to maneuver the monetary policy.

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Why The Central Bank Should Not Aim For Zero Inflation

 

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