Reportgreen2010

The Optimal Rate of Inflation

65 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Observed inflation targets around the industrial world are concentrated at two percent per year.This chapter investigates the extent to which the observed magnitudes of inflation targets are consistent with the optimal rate of inflation predicted by leading theories of monetary nonneutrality.We find that consistently those theories imply that the optimal rate of inflation ranges from minus the real rate of interest to numbers insignificantly above zero.Furthermore, we argue that the zero bound on nominal interest rates does not represent an impediment for setting inflation targets near or below zero.

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References

1993Discretion versus policy rules in practice 1983Staggered prices in a utility-maximizing framework 2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 1999By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior 2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 1996Staggered Prices in a Utility-Maximizing Framework 2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 2004Interest and Prices

Cited by

2018The Oxford Handbook of Productivity Analysis 2011Is there a trade-off between inflation and output stabilization?2019The Optimal Inflation Target and the Natural Rate of Interest 2011Monetary policy when wages are downwardly rigid: Friedman meets Tobin 2014Optimal discretionary monetary policy in a micro-founded model with a zero lower bound on nominal interest rate 2010The Optimal Inflation Rate in New Keynesian Models

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