ABSTRACT
Central banks are placing greater emphasis on maintaining low inflation, and this raises the question: How low should inflation be? Some say that the current level of inflation is acceptable, while others argue that inflation should be pushed toward zero. There are a number of ways to think about this problem, and one approach focuses on conditions for the optimal quantity of money. But economizing on money is somewhat wasteful from society’s point of view. For while money is costly to hold, it is essentially costless for central banks to produce. Thus, by increasing the quantity of real balances, the central bank could make everyone better off at no cost to itself. Quantitative information on the amount of money held abroad or used in the underground economy is sparse, however, and it is difficult to say how much these factors might raise the optimal inflation rate.
