5 to 6 percent range.” Based on this statistic alone, it can be argued that the more moderate U.S. approach has enjoyed greater success than the deflation oriented policy pursued by the Bank of Canada: Canada continues to be burdened with a higher rate of unemployment. Yet, it continues to believe that the unemployment costs of low inflation are ‘transitory and small’ . The directors of most European Central Banks also continue to support this dogma. Clearly, the credibility of the “classical idea that the Phillips trade off between inflation and unemployment disappears in the long run” is still very high throughout the world. But, in Canada, as in most of Europe, the waiting continues.This is not to suggest that the waiting game has been silent and entirely pleasant. Indeed, the relative lack (or lag!) of success of zero inflation policies and strict price controls has spurred much heated debate. As a case in point, more people are curious why Canada has exclusively focused on inflation cutting and turned a blind eye to the more balanced, and arguably more successful, approach adopted by the U.S.. Is it actually desirable, or wise, to aim towards virtual price stability? Are there real long-term benefits to low, or zero, inflation? What are the real effects of low inflation? The intensity of the ongoing debate on these issues provides evidence that there are no straightforward answers. The purpose of this paper is to probe at these issues in an attempt to cast some clarity on the debate. Appropriately, it begins with an analysis of the consequences of low inflation on the conduct of monetary policy. As is well known, these effects are controversial, and this paper in no way purports to end the deadlock. Bringing the relevant issues to the fore, however, is equal to carrying a well-stocked toolbox that contains many of the necessities for well-crafted opinions. The Consequences of Low...
