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Commitment policy and optimal positive long-run inflation

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  • Pontiggia, Dario

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

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
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  16. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
  17. Prescott, Edward C., 1977. "Should control theory be used for economic stabilization?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 7(1), pages 13-38, January.
  18. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  19. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
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