Should the central bank aim for zero inflation (Economics) Essay

Should the central bank aim for zero inflation (Economics) - Essay Example rcent inflation rate would not be in line with the natural rate of unemployment in the country therefore targeting a zero percent inflation would not serve the interests of the economy. A dominant economy phenomenon before great depression was the fact that there was a deflation in the economy as the prices tend to come down rather than go up however after the happening of Great Depression, a new phenomenon of inflation emerged under which prices showed the tendency to increase over the period of time rather than decrease. Increase in general price level or inflation have very threatening impacts on the economy as it not reduce the purchasing power of a consumer but it also reduce the competitive advantage of the countries as rising inflation would make the goods and services of that country more expensive hence less competitive in international market. Thus the question arise for the monetary policy experts of the country as to what level of inflation within the economy can be achieved in order to keep the competitiveness of the economy intact. The argument which is often brought forward in order to bring the price stability is the fact that price stability can not be achieved without sacrificing the employment level in the country. Thus there is a negative relationship between the inflation and unemployment in the country. If policy makers tend to contain the inflation down, the unemployment levels in the economy would increase and similarly if fiscal and monetary policymakers aim to achieve the low unemployment level in the country, inflation is going to increase. (Gramley). â€Å"Economists label the relationship between inflation and unemployment the Phillips curve. According to NAIRU, the Phillips curve is vertical; its verticality indicates that if the central bank (i.e., the Fed) increases inflation, there is no reduction in the unemployment rate. Similarly, lowering the inflation rate also has no effect on unemployment. This means that the inflation rate