What is the optimal rate of inflation Essay Example | Topics and Well Written Essays - 1000 words

What is the optimal rate of inflation - Essay Example The causes of inflation are many and complex but economists do point towards the interaction between the output given by an economy and the supply of money in a system as well as the interest rates established by the government as guides for what inflation would be present in a country. Monetarist economists believe that the supply of money is most important in setting the rate of inflation while the Keynesian economists suggest that interest rates and economic output set the rate of inflation (Wikipedia, 2007). The problem with defining what the optimal rate of inflation should be comes from the difference in theory and practice. Certain theories point towards negative inflation being the best but it has been shown that countries with negative inflation suffered the consequences because other factors influenced their economic situation. Others suggest that a positive rate could be the optimal answer but some countries have suffered from uncontrolled inflation and overheating economies when inflation became difficult to control. Politicians on the other hand prefer to see zero inflation since it is easy to project an idea of economic stability if they can point towards zero inflation as well as a zero unemployment rate (Palley, 1998). Another difference between economists and the economic policies of several state operated banks around Europe is their optimal rate of inflation. It seems that there is no real consensus on the idea and while some economists suggest that the optimal rate of inflation in an economy is slightly negative (Friedman, M. 1969), others show with examples from recent history that a slight rate of inflation could actually be good for the economy (Sinclair, 2003). The dominant economic paradigm, subscribed to by both the government and the stock markets, is the theory of the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This is also called the alias the natural rate of unemployment (Palley, 1998). The theory maintains that if the