Today, these countries can claim considerable success in reducing both inflation and inflationary expectations. For example, despite the run-up in energy prices in 2000, consumer price inflation rates from 1999.Q3 through 2000.Q3 fell to 3.5% in the U.S., to 3.2% in the U.K., to 1.6% in the EMU countries, to 2.7% in Canada, to 0.9% in Sweden, and to 3.0% in New Zealand. Japan, with an inflation rate of -1.2%, is something of a special case, as it is just beginning to emerge from a prolonged recession.
With inflation rates now in the low single digits, attention has become more narrowly focused on the problem of determining quantitatively what the "optimal" inflation rate should be. Evidence to date suggests that policymakersiews have coalesced, however tentatively, around a "2% solution" to this question. For example, consider these explicit inflation targets: 2.5% for the...
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...steps to lower the inflation rate and to ensure that it remains low. The question that many are grappling with is how low should they go? The evidence suggests that there is a perhaps tentative coalescence of views around the choice of 2%. Research to date would support further reductions in the inflation rate to zero or to a mild deflation. However, further research is needed both on the functioning of economies at near-zero nominal interest rates, as emphasized recently by Lucas (2000), and on the nature and influence of various types of contractual arrangements, including financial as well as labor contracts, around which an important share of economic activity is organized. The results of this research may enhance the arguments for an outcome closer to the "2% solution," but in any case is likely to suggest that a refinement of these inflation goals is called for.
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