This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

What is the optimal inflation rate?

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Roberto M. Billi
George A. Kahn

Additional information is available for the following registered author(s):

Abstract

With inflation in the United States and elsewhere low by historical standards, the question of what inflation rate policymakers should aim for has moved front and center. Knowing what inflation rate to aim for is critically important for maximizing the economic well-being of the public. ; Most policymakers agree they should not allow inflation to fall below zero because the costs of deflation are thought to be high. They disagree, however, about how much above zero, if any, central banks should aim to keep inflation. Unfortunately, rigorous estimates of an "optimal inflation rate" have not been available in the economics literature. ; Billi and Kahn provide estimates of the optimal inflation rate. Based on a standard, modern macroeconomic model calibrated to U.S. data, they estimate the optimal inflation rate to be 0.7 to 1.4 percent per year as measured by the PCE price index. This estimate is the first to be based on an economic model in which policymakers are assumed explicitly to maximize the economic well-being of the public. Further research is required to confirm or refine these results using models that incorporate a richer array of possible interactions between the long-run inflation objective and economic stability.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.kansascityfed.org/Publicat/ECONREV/PDF/2q08billi_kahn.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2008)
Issue (Month): Q II ()
Pages: 5-28
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:fip:fedker:y:2008:i:qii:p:5-28:n:v.93no.2

Contact details of provider:
Postal: 1 Memorial Drive, Kansas City, MO 64198-0001
Phone: (816) 881-2254
Email:
Web page: http://www.kansascityfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://app.ny.frb.org/cfpicnic/frame1.cfm

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Inflation (Finance);

Other versions of this item:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Athanasios Orphanides, 2004. "Monetary policy in deflation: the liquidity trap in history and practice," Finance and Economics Discussion Series 2004-01, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 15-29. [Downloadable!]
  3. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2000-1), pages 1-60. [Downloadable!]
  4. George A. Akerlof & William T. Dickens, 2007. "Unfinished Business in the Macroeconomics of Low Inflation: A Tribute to George and Bill by Bill and George," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2007-2), pages 31-48. [Downloadable!]
  5. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December. [Downloadable!] (restricted)
  6. Reifschneider, David L. & Roberts, John M., 2006. "Expectations formation and the effectiveness of strategies for limiting the consequences of the zero bound," Journal of the Japanese and International Economies, Elsevier, vol. 20(3), pages 314-337, September. [Downloadable!] (restricted)
  7. Robert J. Gordon, 2006. "The Boskin Commission Report: A Retrospective One Decade Later," NBER Working Papers 12311, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
  9. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    Other versions:
  10. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  11. Günter Coenen & Athanasios Orphanides & Volker Wieland, 2004. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," Advances in Macroeconomics, Berkeley Electronic Press, vol. 4(1), pages 1187-1187. [Downloadable!] (restricted)
    Other versions:
  12. F. Brayton & P. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  14. Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City. [Downloadable!]
  15. Flint Brayton & Eileen Mauskopf & David Reifschneider & Peter Tinsley & John Williams, 1997. "The role of expectations in the FRB/US macroeconomic model," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 227-245. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. S. Boragan Aruoba & Frank Schorfheide, 2009. "Sticky prices versus monetary frictions: an estimation of policy trade-offs," Working Papers 09-8, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  2. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Working Paper Series 2009-03, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? You too can volunteer for RePEc, for example by providing information about publications in your institution.

This page was last updated on 2009-10-15.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.