Why, then, are so many central bankers so worried about low inflation rates?

Like most economists, he believes that if policymakers try to keep interest rates at artificially low levels for too long, eventually demand will soar and inflation will jump. So, if inflation is low and stable, central banks cannot be blamed for low long term rates.

Some central banks began to raise interest rates pre emptively, albeit in small steps to counter the risk of potentially higher inflation in 2005, signalling the end of the low inflation, low interest rate environment of the last two years.

For example, low and stable rates of inflation enable firms to have longer term horizons in planning their investments.

Falling oil prices and the prospect of a prolonged period of low inflation also seem to have affected inflation expectations. Given the potency of the recent oil price shock, the risk is that inflation may temporarily slip into negative territory in the coming months.

But it is impeded by slow growth and, thanks to high unemployment and weak global demand, persistently low inflation. Worse, over the longer term, low investment undermines productivity, while protracted unemployment destroys skills.

The importance of maintaining sound macroeconomic policy, reflected in a stable exchange rate and low inflation, has been underscored for several decades.

Although the disadvantages of radical incentive plans were increasing, such as long term low interest rates eroding the profits of financial institutions, the low inflation forced the Bank of Japan to maintain the plan.

Overall, the Canadian economy performed solidly, with sustained economic growth, low and stable inflation and interest rates, and improved resilience to economic shocks.

Nominal interest rates for periphery countries sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low. The eurozone now is facing not only a financial crisis, but a stagnation crisis.

Low inflation is already a serious obstacle to economic recovery and rebalancing within the eurozone. Outright deflation would be an even more dangerous threat.

Monitoring of monetary (and credit) targets would still be important in achieving the inflation objective. Furthermore, it should be easier to adopt the new framework when times are good like now, when growth is strong and inflation is low.

In a more global context, none of this is to dismiss the longer term dangers of inflation. In most countries, at most times, inflation should be kept very low and central banks should anchor inflation expectations with a stable long term target, although the alternative of targeting nominal GDP deserves to be discussed.

In the 1980s, Volcker s historic responsibility was to reduce inflation and prevent it from ever rising again to dangerously high levels. Today, Yellen s historic responsibility is to increase inflation and prevent it from ever falling again to dangerously low levels.

Global investors are apparently willing to accept these extraordinarily low rates, even though they do not appear to compensate for expected inflation. Indeed, the rate on inflation adjusted US Treasury bills (so called TIPS ) is now negative up to 15 years.

5. Welcomes the assessment by the Caribbean Development Bank in its 1999 report that the economy continued to expand with considerable output and low inflation

But, while inflation is very likely to remain low for the next few years, I am puzzled that bond prices show that investors apparently expect inflation to remain low for ten years and beyond, and that they also do not require higher interest rates as compensation for the risk that the fiscal deficit will cause real interest rates to rise in the future.

Meanwhile, sound monetary policy, guided by a series of talented central bankers (whose independence is enshrined in Chile s constitution), has prevented inflation and kept long term rates relatively low. Chile s inflation target is 3 with an acceptable range of plus or minus 1 .

On the monetary side, the Reserve Bank of India should focus on keeping inflation low and stable, ensuring optimal conditions for growth. As it focuses on inflation, however, the RBI must recognize that emerging markets are not as resilient as industrial economies.

Phelps key observation in macroeconomics was that the relationship between inflation and unemployment is affected by expectations, and since expectations themselves are endogenous they change over time so, too, will the relationship between unemployment and inflation. If a government attempts to push the unemployment rate too low, inflation will increase, and so, too, will inflationary expectations.

BRUSSELS Stubbornly low inflation has the European Central Bank worried. But its response essentially just more quantitative easing could backfire, exacerbating imbalances and generating serious financial instability.

Brown understood that these priorities were essential, not just for the British economy, but also for the long term prospects of Labour in power and he entrenched this agenda by giving the Bank of England independent responsibility for keeping inflation low. As a result, Britain has had an unprecedented decade of low inflation and relatively high economic growth, outperforming many of its European counterparts.

Countries are experiencing strong growth, inflation is low, and the threat of crisis has receded considerably. Few countries need to borrow from the IMF a highly positive trend.

In November, annual inflation in the euro area fell to a cyclical low of 0.3 , largely owing to the sharp fall in oil prices since the end of the summer. But falling core inflation (which excludes volatile energy and food prices) also points to weak aggregate demand.

But episodes in recent decades for example, high inflation in the 1970 s overwhelmed much of what was learned. As a result, many advanced countries today are repeating the mistake of 1937, despite facing similar macroeconomic conditions high unemployment, low inflation, and near zero interest rates.

But, if the unemployment rate is then still relatively high say, above 7 some members of the Fed s Open Market Committee may argue that the Fed s dual mandate low unemployment as well as low inflation implies that it is too soon to raise interest rates.

Morocco boasts solid infrastructure, a robust banking system, sound public finances, low inflation, and manageable unemployment. Despite capital flight from much of the region, foreign investment continues to flow in.

True, back then, monetary authorities were working with old fashioned Keynesian macroeconomic models, which encouraged the delusion that monetary policy could indefinitely boost the economy with low inflation and low interest rates. Central bankers today are no longer so naive, and the public is better informed.

Brown decisively changed that reputation. He has been probably the most outstanding Chancellor of the Exchequer in British history, not because of any inspiration or genius, but simply because he has built on a new tradition of prioritizing low inflation, low interest rates, and stable government finances.

Today, as in the 1960 s or 1970 s, we face a fundamentally global problem of inconsistent monetary policies. Back then, Europeans complained that low interest rates in America were driving global inflation now low US interest rates are blamed for driving irresponsible asset price booms.

But if that were true, central banks around the world would have set it as a target long ago. Instead, all of them define price stability as low, stable, but positive inflation.

A second reason for relatively low inflation in recent years has been a temporary fall in the cost of production. As firms shed workers during the economic downturn, output fell more slowly.

Many African countries have used the past decade to put in place sound and sustainable economic policies that have delivered robust growth and low inflation. Together with debt relief, these policies have resulted in low levels of public debt, relatively sound financial systems, and most important  rising living standards.

Many African countries have used the past decade to put in place sound and sustainable economic policies that have delivered robust growth and low inflation. Together with debt relief, these policies have resulted in low levels of public debt, relatively sound financial systems, and most important rising living standards.

Moreover, verbal intervention will be followed by policy action, because slower growth and low inflation partly triggered by a strong dollar will induce the Fed to exit zero policy rates later and more slowly than expected. That will reverse some of the dollar s recent gains and shield growth and inflation from downside risks.

So the Fed is right to say that inflation is low because of the sharp drop in energy prices but it need not worry about the effect of major trading partners lower currency values. And, again, when the price of energy stops declining, the inflation rate will rise close to the core rate of 1.8 .

Here, too, the record since 1980 has been patchy, despite the huge deflationary pressure exerted by low wage competition from Asia. Inflation in 1950 1973 and 1980 2007 was about the same just over 3 while inflation targeting has failed to prevent a succession of asset bubbles that have brought recessions in their wake.

Indeed, the government s key economic committee, the Central Work Committee, has concluded that after years of high growth and low inflation, China is on a route to high growth with high inflation. This invariably means that fiscal and monetary stability will become a priority while controlling the trade surplus has become a lower one.

The most widely cited example of a deflationary economy is Japan. But Japan has experienced a low rate of inflation and some sustained short periods of deflation without ever producing a downward price spiral.

But the situation on the economic front is more mixed. Inflation and unemployment are low, but growth is largely flat, and few experts I spoke with in Tokyo recently expect it to accelerate significantly.

At the moment, no country is truly suffering deflation, but that may change as the crisis deepens. Germany, with its notoriously low inflation rate, may be among the first countries to experience declining prices.

Forget Inflation

Developing country central banks keep interest rates artificially low to ensure sufficient low cost financing for the public sector, while avoiding large fiscal deficits and high inflation. But, in the long run, such low interest rates may also discourage households from saving, lead to insufficient private sector investment, and eventually result in economy wide underinvestment, as occurred in many Latin American countries in the past.

So the good news is that the possibility of significant inflation or deflation during the next few years is low on the list of economic risks faced by the US economy and by financial investors.

Moreover, low interest rate policies transfer inflation risk to all savers and to future generations. Perhaps the greatest insult to taxpayers, then, is that bankers compensation last year was back at its pre crisis level.