This paper analyses two reasons why inflation may interfere with price adjustment so as to create inefficiencies in … resource allocation at low rates of inflation. The first argument is that the higher the rate of inflation the lower the … second argument is that low inflation strengthens nominal price rigidities and thus impairs the flexibility of the price …

Inflation may enhance the efficiency of the price system in the presence of nominal rigidities. For the price system to … changing prices but also on the realized shocks, it follows that the rate of inflation may affect the incentive to change … prices. The higher the rate of inflation the larger the incentive to change prices, and in the presence of real shocks …