<blockquote>
<p>This suggests that it is possible to have zero inflation, and the fact that there is inflation, even if 2%, is an active policy choice by the fed. In some sense, the fed is creating inflation purposely. Is this right?</p>
</blockquote>
<p>Of course, it is possible to have policy where inflation rate is 0%. But this would not be consistent with Fed's mandate of full employment because in short run it is not possible to have full employment without non-zero inflation in presence of nominal rigidities (e.g. see some discussion of this in Romer (2012) Advanced Macroeconomics).</p>
<p>Nonetheless, it is correct to say that they are creating inflation purposefully, as a consequence of following their mandate.</p>

CC BY-SA 4.0
2024-10-20T12:43:17.173Z
In the absence of these rigidities, you would have a lower equilibrium wage and full employment. In this case it would be possible to have zero inflation and meet the employment mandate. Is this correct?
User2956
CC BY-SA 4.0
2024-10-20T19:27:55.247Z
@User2956 sure if markets are perfect and there are no rigidities then trivially you can have both full employment at all times and zero inflation
1muflon1
CC BY-SA 4.0
2024-10-21T09:54:14.360Z
Okay, got it. Thanks
User2956
CC BY-SA 4.0
2024-10-20T11:49:30.687Z
2024-10-20T11:49:30.687Z
1muflon1
<p>In terms of the Philips curve, the difference between actual and expected inflation is proportional to the cyclical unemployment, or this can equivalently be written in terms of the output gap between current output and potential output.</p>
<p>So at general equilibrium, we have inflation steady at the expected inflation. If expected inflation was zero or this is the anchor the fed chose, then we would have zero inflation at equilibrium. As output exceeded potential output and inflation rose, interest rates could be increased to bring output back to potential and inflation back to zero.</p>
<p>This suggests that it is possible to have zero inflation, and the fact that there is inflation, even if 2%, is an active policy choice by the fed. In some sense, the fed is creating inflation purposely. Is this right?</p>

<macroeconomics>
Is the fed purposely creating inflation?
User2956
# Is the fed purposely creating inflation?

(Asked by: username_0 on 2024-10-20)

In terms of the Philips curve, the difference between actual and expected inflation is proportional to the cyclical unemployment, or this can equivalently be written in terms of the output gap between current output and potential output.

So at general equilibrium, we have inflation steady at the expected inflation. If expected inflation was zero or this is the anchor the fed chose, then we would have zero inflation at equilibrium. As output exceeded potential output and inflation rose, interest rates could be increased to bring output back to potential and inflation back to zero.

This suggests that it is possible to have zero inflation, and the fact that there is inflation, even if 2%, is an active policy choice by the fed. In some sense, the fed is creating inflation purposely. Is this right?

**Tags:** macroeconomics


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## 1 answers

### Answer by username_1 on 2024-10-20. Score: 1 | Accepted answer

> This suggests that it is possible to have zero inflation, and the fact that there is inflation, even if 2%, is an active policy choice by the fed. In some sense, the fed is creating inflation purposely. Is this right?

Of course, it is possible to have policy where inflation rate is 0%. But this would not be consistent with Fed's mandate of full employment because in short run it is not possible to have full employment without non-zero inflation in presence of nominal rigidities (e.g. see some discussion of this in Romer (2012) Advanced Macroeconomics).

Nonetheless, it is correct to say that they are creating inflation purposefully, as a consequence of following their mandate.

> **Comments:**
> **username_0**: In the absence of these rigidities, you would have a lower equilibrium wage and full employment. In this case it would be possible to have zero inflation and meet the employment mandate. Is this correct?  
> **username_1**: @username_0 sure if markets are perfect and there are no rigidities then trivially you can have both full employment at all times and zero inflation  
> **username_0**: Okay, got it. Thanks  

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