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Hyperbolic Discounting and Positive Optimal Inflation

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  • Liam Graham
  • Dennis Snower

Abstract

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-05/cesifo1_wp3464.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3464.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3464

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Keywords: optimal monetary policy; inflation targeting; unemployment; Phillips curve; nominal inertia; monetary policy;

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  14. Liam Graham & Dennis J. Snower, 2008. "Hyperbolic Discounting and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 427-448, 03.
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Cited by:
  1. Steffen Ahrens & Dennis Snower, 2012. "Envy, Guilt, and the Phillips Curve," CESifo Working Paper Series 3717, CESifo Group Munich.
  2. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.

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