Description

This essay assesses the benefits of a low-in flation environment for the world economy. To start, the main costs of inflation are revi ewed—namely, how it distor ts the calculus of profitability, encouraging short- term projects at the expense of longer-term investment and diminishing the value of relative price signals . Then, the progress that most countries have made in recent years toward achieving low in flation is reviewed. The new low-inflation environment has brought noticeable gains—fast er global growth, increased stability, and reduced vulnerability. The role of the IMF in helping foster a low-inflation environment is also discussed, highlighting the Fund’s importa nt support for policy reform efforts in its member countries. To conclude, the essay iden tifies future challenges for economists and policymakers: locking in the benefits of low inflation, identifying how far policies should go toward lowering inflation further, and expa nding the knowledge frontiers on the transition toward adopting inflation targeting.