But, political characteristics do provide flexibility. In some countries, high rates of inflation have clearly been compatible with rapid economicgrowth and fast rising standards of living. In such cases, it is quite reasonable to suggest that higher rates of inflation are acceptable--perhaps even necessary. In this setting, it is by no means clear that pursing a policy to stop moderate inflation is either required, or in the best interests of the mass of the population at all. While inflation guarantees that some will gain at the expense ofothers, the redistributions of income and wealth which do take place can, on normal value grounds, be quite desirable.
In other circumstances, it may be quite desirable to place strict controls on inflation, or strive to keep it at ‘zero’ level. Policies aimed at virtual price stability have been in use by central banks in Europe, New Zealand, and Canada over the past few years. Such policieshave been particularly focused in Canada. As noted by Pierre Fortin, “the only objective the Bank of Canada has pursued since 1989 has been to establish and maintain the inflation rate at ‘zero level’, which it sees as a CPI inflation rate that is clearly below two percent” (italic added). To the surprise of many, it has been incredibly successful, achieving its objective several years beforeschedule.
Although separated by only a few percentage points, Canada’s policy is a sharp contrast to the moderate and balanced approach used in the U.S. “Since 1989 the Federal Reserve has been satisfied with achieving an inflation rate of around 3 percent. In setting the interest rate, it has continued to pay explicit attention to real economic growth and employment, with the result that the U.S.unemployment rate is currently in the 5 to 6 percent range.” Based on this statistic alone, it can be argued that the more moderate U.S. approach has enjoyed greater success than the deflation oriented policy pursued by the Bank of Canada: Canada continues to be burdened with a higher rate of unemployment. Yet, it continues to believe that the unemployment costs of low inflation are ‘transitoryand small’. The directors of most European Central Banks also continue to support this dogma. Clearly, the credibility of the “classical idea that the Phillips trade off between inflation and unemployment disappears in the long run” is still very high throughout the world. But, in Canada, as in most of Europe, the waiting continues.
This is not to suggest that the waiting game has been silent...