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July/August 1995, 
Vol. 77, No. 4
Posted 1995-07-01

Is There a Case for "Moderate" Inflation?

by Alvin L. Marty and Daniel L. Thornton

Two objections to making price stability the primary objective of monetary policy are (1) moderate inflation is good for the economy and (2) it is less costly to live with moderate inflation than to eliminate it. Reviewing the first objection, Alvin L. Marty and Daniel L. Thornton consider four arguments, namely, that moderate inflation enhances economic stability, increases output per person, increases the efficiency of interindustry wage adjustments, and enhances the efficacy of countercyclical monetary policy. Considering the second point, they argue that concern for transitional unemployment is a frail foundation for a policy of moderate inflation.