Price-level Optimality

Abstract

This chapter addresses price level optimality, but our focus of interest is with price-level changes over time rather than with the absolute level of prices as such. The absolute level of prices is of little or no interest in itself, but price-level changes can have profound and complex consequences. Most economists believe that a continually rising price level (i.e., inflation) damages the economy and, indeed, the social order more generally, but there is much controversy over how it does so and how damaging it is. This chapter tries to address these issues and come to a judgement on what the optimal price-level path might be.

Part of this chapter is forthcoming as ‘The Costs of Inflation and Disinflation’, Cato Journal.