Revisit Zero Inflation Policy: Feasible or Mirage?

Abstract

This paper revisits the zero inflation policy in the post Great Recession period to bring the most updated facts about the effectiveness of the policy in the United States. We analyze the major benefits and costs of zero inflation. We point out that the benefits of the policy are not as significant as people thought, while the costs can easily exceed the benefits. In addition, we discuss the feasibility of the policy. The money wage rigidity, people’s suspicious attitude toward the disinflation policy, and the presence of zero lower bounds (ZLB) of interest rates place dramatic barriers to the implementation of the zero inflation policy, making it almost infeasible. Therefore, the Federal Reserve should achieve a balance between the costs and benefits of preventing inflation rather than target at zero inflation.