Working paper No.82
By Anthony Yates
This paper asks whether downward nominal rigidities in wages and prices provide a case for targeting positive rates of inflation. It argues that the theoretical restrictions needed to generate downward nominal rigidities are more stringent than has been conceded in the literature; money-illusion and/or fairness considerations are not enough. The paper also assesses the empirical evidence for there being downward nominal rigidities: while the evidence is not conclusive enough to rule out these rigidities entirely, empirical results—including some new results reported in this paper—are not supportive. The paper concludes that there are grounds for targeting positive inflation: the mis-measurement of inflation described in Cunningham (1996) and possibly the desire to leave room for negative (ex post) real interest rates (see Summers (1991)). But downward nominal rigidity does not seem to be one of them.