Editing Inflation (section)

=== Positive ===

;Labour-market adjustments: Nominal wages are [[Sticky (economics)|slow to adjust downward]]. This can lead to prolonged disequilibrium and high unemployment in the labor market. Since inflation allows real wages to fall even if nominal wages are kept constant, moderate inflation enables labor markets to reach equilibrium faster.<ref>{{cite journal |last1=Tobin |first1=James |date=1972 |title=Inflation and Unemployment |url=https://www.jstor.org/stable/1821468 |journal=American Economic Review |volume=62 |issue=1 |pages=1–18 |jstor=1821468 |access-date=2023-03-22}}</ref>

;Room to maneuver: The primary tools for controlling the money supply are the ability to set the [[discount window|discount rate]], the rate at which banks can borrow from the central bank, and [[open market operations]], which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) to stimulate the economy{{snd}}this situation is known as a [[liquidity trap]].

;Mundell–Tobin effect: According to the Mundell–Tobin effect, an increase in inflation leads to an increase in capital investment, which leads to an increase in growth.<ref>{{Cite web |last=Edwards |first=Jeffrey A. |date=2006 |title=Politics, Inflation, and the Mundell–Tobin Effect |url=https://mpra.ub.uni-muenchen.de/36443/ |access-date=2022-06-09 |website=mpra.ub.uni-muenchen.de |language=en |archive-date=November 1, 2018 |archive-url=https://web.archive.org/web/20181101141711/https://mpra.ub.uni-muenchen.de/36443/ |url-status=live }}</ref> The [[Nobel Memorial Prize in Economic Sciences|Nobel]] laureate [[Robert Mundell]] noted that moderate inflation would induce savers to substitute lending for some money holding as a means to finance future spending. That substitution would cause market clearing real interest rates to fall.<ref>{{cite journal|last=Mundell|first=James|journal=Journal of Political Economy|volume=LXXI|year=1963|pages=280–283 |title=Inflation and Real Interest|issue=3|doi=10.1086/258771|s2cid=153733633}}</ref> The lower real rate of interest would induce more borrowing to finance investment. In a similar vein, Nobel laureate [[James Tobin]] noted that such inflation would cause businesses to substitute investment in [[physical capital]] (plant, equipment, and inventories) for money balances in their asset portfolios. That substitution would mean choosing the making of investments with lower rates of real return. (The rates of return are lower because the investments with higher rates of return were already being made before.)<ref>Tobin, J. ''Econometrica'', Vol. 33, (1965), pp. 671–684 "Money and Economic Growth"</ref> The two related effects are known as the [[Mundell–Tobin effect]]. Unless the economy is already overinvesting according to models of [[Economic growth|economic growth theory]], that extra investment resulting from the effect would be seen as positive.

;Instability with deflation:  Economist [[Sho-Chieh Tsiang|S.C. Tsiang]] noted that once substantial deflation is expected, two important effects will appear; both a result of money holding substituting for lending as a vehicle for saving.<ref>{{cite journal |last1=Tsiang |first1=S. C. |title=A Critical Note on the Optimum Supply of Money |journal=Journal of Money, Credit and Banking |date=1969 |volume=1 |issue=2 |pages=266–280 |doi=10.2307/1991274 |jstor=1991274 |url=https://ideas.repec.org/a/mcb/jmoncb/v1y1969i2p266-80.html |language=en |access-date=October 20, 2020 |archive-date=April 25, 2021 |archive-url=https://web.archive.org/web/20210425223335/https://ideas.repec.org/a/mcb/jmoncb/v1y1969i2p266-80.html |url-status=live |url-access=subscription }}</ref> The first was that continually falling prices and the resulting incentive to hoard money will cause instability resulting from the likely increasing fear, while money hoards grow in value, that the value of those hoards are at risk, as people realize that a movement to trade those money hoards for real goods and assets will quickly drive those prices up. Any movement to spend those hoards "once started would become a tremendous avalanche, which could rampage for a long time before it would spend itself."<ref>Tsiang, 1969 (p. 272).</ref> Thus, a regime of long-term deflation is likely to be interrupted by periodic spikes of rapid inflation and consequent real economic disruptions. The second effect noted by Tsiang is that when savers have substituted money holding for lending on financial markets, the role of those markets in channeling savings into investment is undermined. With nominal interest rates driven to zero, or near zero, from the competition with a high return money asset, there would be no price mechanism in whatever is left of those markets. With financial markets effectively euthanized, the remaining goods and physical asset prices would move in perverse directions. For example, an increased desire to save could not push interest rates further down (and thereby stimulate investment) but would instead cause additional money hoarding, driving consumer prices further down and making investment in consumer goods production thereby less attractive. Moderate inflation, once its expectation is incorporated into nominal interest rates, would give those interest rates room to go both up and down in response to shifting investment opportunities, or savers' preferences, and thus allow financial markets to function in a more normal fashion.