NCPA - National Center for Policy Analysis

Low Inflation And Low Unemployment Are Sustainable

June 28, 2000

During the past five years, economists have been trying to figure out how low unemployment can go without triggering inflation.

Now three respected economists are about to come forth with a paper claiming that the jobless rate could long remain as low as 4.5 percent without a surge in prices.

  • That is higher than the current rate of 4.1 percent -- but well below 5 percent, which is the consensus of mainstream analysts.
  • The three economists believe the long-term jobless rate can be kept down with consumer prices rising about 3.4 percent a year -- compared with the 3.1 percent annual rate recorded so far this year.
  • They say that prices would then stabilize at that level and wouldn't accelerate -- as other economists fear.
  • In fact, they argue that a moderate level of price increases -- rather than zero inflation -- is ideal because it allows the maximum number of Americans to hold jobs without threatening the economy.

The study, which will be published next month by the Brookings Institution, is already being circulated in draft form at the Federal Reserve where it is reportedly sparking considerable debate.

The paper was written by George Akerlof of the University of California-Berkeley, the Brookings Institution's George Perry and William Dickens, also at Brookings.

Source: Yochi J. Dreazen, "New Study Stirs Federal Reserve Debate," Wall Street Journal, June 28, 2000.


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