Optimal Inflation for the US Economy
- (pp. 29-52)
Abstract
This paper studies the optimal long-run inflation rate (OIR) in a small New Keynesian model, where the only policy instrument is a short-term nominal interest rate that may occasionally run against a zero lower bound (ZLB). The model allows for worst-case scenarios of misspecification. The analysis shows first, if the government optimally commits, the OIR is below 1 percent annually. Second, if the government re-optimizes each period, the OIR rises markedly to 17 percent. Third, if the government commits only to an inertial Taylor rule, the inflation bias is eliminated at very low cost in terms of welfare for the representative household. (JEL E12, E31, E43, E52, E58)Citation
Billi, Roberto M. 2011. "Optimal Inflation for the US Economy." American Economic Journal: Macroeconomics, 3 (3): 29-52. DOI: 10.1257/mac.3.3.29Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies
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