The long-run effects of low inflation rates

Low price inflation is an official monetary policy target in many countries because of the positive effects it may generate on economic growth. However, if nominal wage rigidities exist, low price inflation may have a negative effect on economic growth. In this paper we test whether there exists a minimum level in the wage inflation ratefor a number of European countries. When the economy moves close to this wageinflation rate real effects become extreme. Low price inflation rates coincide with high unemployment rates. The estimation results show a significant minimum wageinflation rate for each of the countries, lying in the 1.98% to 5.32% range.