General Discussion

Lawrence Summers suggested that although no one has explicitly rejected the Akerlof-Dickens-Perry analysis, no central bank has explicitly adopted that analysis in making monetary policy. The idea that the wage mechanism behaves differently at 1 percent annual inflation than at 2½ percent inflation does not appear to be an important factor in central bank decisionmaking. Insofar as central banks have adopted higher inflation targets, this has occurred not because of concern about unemployment, but because of concern about the implications of deflation for real interest rates.

George Perry replied that the Akerlof-Dickens-Perry ideas actually did get some attention at the Federal Reserve and other central banks. A common theme in the literature before the mid-1990s was that zero inflation is ideal, even though people have understood the potential negative consequences of deflation for a long time. Therefore the apparent decision by the Federal Reserve not to pursue zero inflation may reflect some concern about the trade-off with unemployment.

William Dickens added that the Bank of New Zealand had expressly considered this research when making its decision to increase its inflation target. Further, when many economists were advocating zero inflation in the 1990s, he, Akerlof, and Perry argued that this option should be taken off the table, and this has since happened. In fact, all inflation-targeting central banks currently target inflation in the 1 to 2 percent range.