Optimal Trend Inflation
AbstractSticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (i) the optimal steady-state inflation rate generically differs from zero and (ii) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogeneous-firm model with sticky prices in closed form. Using firm-level data from the US Census Bureau, we estimate the historically optimal inflation path for the US economy: the optimal inflation rate ranges between 1 percent and 3 percent per year and displays a downward trend over the period 1977–2015.
CitationAdam, Klaus, and Henning Weber. 2019. "Optimal Trend Inflation." American Economic Review, 109 (2): 702-37. DOI: 10.1257/aer.20171066
- C51 Model Construction and Estimation
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy