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Optimal inflation for the U.S

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  • Roberto M. Billi

Abstract

What is the correctly measured inflation rate that monetary policy should aim for in the long-run? This paper characterizes the optimal inflation rate for the U.S. economy in a New Keynesian sticky-price model with an occasionally binding zero lower bound on the nominal interest rate. Real-rate and mark-up shocks jointly determine the optimal inflation rate to be positive but not large. Even allowing for the possibility of extreme model misspecification, the optimal inflation rate is robustly below 1 percent. The welfare costs of optimal inflation and the lower bound are limited.>

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 07-03.

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Date of creation: 2007
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Handle: RePEc:fip:fedkrw:rwp07-03

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Keywords: Inflation (Finance);

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Citations

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Cited by:
  1. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Staff Reports 367, Federal Reserve Bank of New York.
  2. Henning Weber, 2011. "Optimal inflation and firms' productivity dynamics," Kiel Working Papers 1685, Kiel Institute for the World Economy.
  3. Florin O. Bilbiie & Ippei Fujiwara & Fabio Ghironi, 2011. "Optimal Monetary Policy with Endogenous Entry and Product Variety," NBER Working Papers 17489, National Bureau of Economic Research, Inc.
  4. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  5. Bennett T. McCallum, 2011. "Should central banks raise their inflation targets? Some relevant issues," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 111-131.
  6. Guerron-Quintana, Pablo A., 2011. "The implications of inflation in an estimated new Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 947-962, June.
  7. S. Boragan Aruoba & Frank Schorfheide, 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 60-90, January.
  8. Olivier Coibion & Yuriy Gorodnichenko & Johannes F. Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," NBER Working Papers 16093, National Bureau of Economic Research, Inc.
  9. Pavasuthipaisit, Robert, 2009. "Optimal exchange-rate policy in a low interest rate environment," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 264-282, September.
  10. Vadim Khramov & John Ridings Lee, 2013. "The Economic Performance Index (EPI): an Intuitive Indicator for Assessing a Country's Economic Performance Dynamics in an Historical Perspective," IMF Working Papers 13/214, International Monetary Fund.
  11. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28.
  12. Roberto Billi, 2008. "Price-level targeting and risk management in a low-inflation economy," Research Working Paper RWP 08-09, Federal Reserve Bank of Kansas City.
  13. Billi, Roberto M., 2012. "Output Gaps and Robust Monetary Policy Rules," Working Paper Series 260, Sveriges Riksbank (Central Bank of Sweden).
  14. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.

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