There is no compelling theoretical case for any inflation rate other than zero

See There is no compelling theoretical case for any inflation rate other than zero from The WSJ.

"William M. Isaac and Richard M. Kovacevich (“The Fed Should Stop Worrying and Learn to Love Low Inflation,” op-ed, Sept. 18) are correct in suggesting the Federal Reserve should stop worrying about getting inflation up to its 2% target noting, among other things, that “inflation does not create greater economic growth.”

However, there are two even stronger economic reasons the Fed should stop worrying about inflation. First, there is no compelling theoretical case for any inflation rate other than zero. The idea that the economy will do better with “moderate inflation” is based on conjecture, not strong economic theory. If inflation reduces output growth even a little, it is very difficult to argue that the best rate of inflation is something other than zero.

At the July 1996 FOMC meeting, Fed Chairman Alan Greenspan stated his preferred rate of inflation was zero, “if inflation is properly measured.” Second, it is not clear that the Federal Open Market Committee can do much about inflation. There are two theories of inflation. One is that inflation is the consequence of excess growth of the money supply. The other is that inflation is the consequence of the gap between actual and potential output. The problem is neither theory works in practice.

Neither can account for the behavior of inflation over at least the last 50 years. Perhaps Messrs. Isaac and Kovacevich should have said the Fed should stop trying to do what it cannot do.

Dan Thornton, Ph.D.
Valley Park, Mo.
Mr. Thornton is a retired vice president of the Federal Reserve Bank of St. Louis."