Akerloff-Dickens-Perry concurred in
the aforementioned paper. At zero inflation, unemployment in America
would go up, in the long run, by 2.6 percentage points. This adverse
effect can, of course, be offset by productivity gains, as has been the
case in the USA throughout the 1990's.
The new consensus is that the price for a substantial decrease in
unemployment need not be a sizable rise in inflation. The level of
employment at which inflation does not accelerate - the
non-accelerating inflation rate of unemployment or NAIRU - is
susceptible to government policies.
Vanishingly low inflation - bordering on deflation - also results in a
"liquidity trap". The nominal interest rate cannot go below zero. But
what matters are real - inflation adjusted - interest rates. If
inflation is naught or less - the authorities are unable to stimulate
the economy by reducing interest rates below the level of inflation.
This has been the case in Japan in the last few years and is now
emerging as a problem in the USA. The Fed - having cut rates 11 times
in the past 14 months and unless it is willing to expand the money
supply aggressively - may be at the end of its monetary tether.
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