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Federal Reserve Governor Frederic S. Mishkin spoke tonight: Comfort Zones, Shmumfort Zones. Mishkin tries to answer the question of why 1% to 2% inflation it better than zero inflation: Can Inflation Be Too Low?While the benefits of low inflation are now widely recognized, somewhat less attention has been given to the pitfalls of maintaining inflation rates very close to zero, so I will now discuss this issue in somewhat greater detail. Specifically, if the average inflation rate is too low, then the economy faces a greater risk that a given adverse shock could distort labor markets, induce debt deflation, or cause monetary policy to become constrained by the zero lower bound on nominal interest rates. These risks imply that undershooting a zero inflation objective is potentially more costly than overshooting that objective by the same amount, and that setting the inflation objective at a rate a bit above zero provides some insurance against these risks. …
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