recent years, many central banks have placed increased emphasis on price stability. Monetary policy—whether expressed in terms of interest rates or growth of monetary aggregates—has been increasingly geared toward the achievement of low and stable inflation. Central bankers and most other observers view price stability as a worthy objective because they think that inflation is costly. Some of these costs involve the average rate of inflation, and others relate to the variability and uncertainty of inflation. But the general idea is that businesses and households are thought to perform poorly when inflation is high and unpredictable. The academic literature contains a lot of theoretical work on the costs of inflation, as reviewed recently by Briault (1995). This analysis provides a presumption that inflation is a bad idea, but the case is not decisive without supporting empirical findings. Although some empirical results (also surveyed by Briault) suggest that inflation is harmful, the evidence is not overwhelming. It is therefore important to carry out additional empirical research on the relation between inflation and economic performance. This article explores this relation in a large sample of countries over the last 30 years.

While there is broad-based agreement that the double-digit inflation of the 1970s is undesirable, there is much less agreement that very low inflation—price stability—is the appropriate goal for monetary policy. The literature on the welfare benefits of low inflation reflects this diversity of

Columbia University for their helpful comments. Any views expressed in this paper are those of

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