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Commitment policy and optimal positive long-run inflation

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Pontiggia, Dario

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Abstract

This paper studies different types of commitment policy in an economy where the deterministic steady state is inefficient. We show how a policy suggested by the approach of policy design entails positive long-run inflation, even in the purely forward-looking canonical New Keynesian model. The long-run inflation target is robust to inflation persistence due to backward-looking rule-of-thumb behaviour by price setters. The optimal long-run inflation target is positive in all but one of the six theoretical cases studied. We evaluate policies on the basis of both the deterministic equilibrium and the stochastic equilibrium and present robustness analysis in terms of two structural parameters.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9534.

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Date of creation: 30 Jun 2008
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Handle: RePEc:pra:mprapa:9534

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Related research
Keywords: Optimal monetary policy; inflation persistence; policy rules; timeless perspective;

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Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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  15. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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