Advanced Search
MyIDEAS: Login to save this paper or follow this series

The optimal inflation rate revisited

Contents:

Author Info

  • Giovanni Di Bartolomeo

    ()
    (University of Teramo (Italy))

  • Patrizio Tirelli

    ()
    (University of Milano Bicocca (Italy))

  • Nicola Acocella

    ()
    (Department of Methods and Models for Economics, Territory and Finance MEMOTEF, Sapienza University of Rome (Italy))

Abstract

We challenge the widely held belief that New Keynesian models cannot predict an optimal positive inflation rate. In fact we find that even for the US economy, characterized by relatively small government size, optimal trend inflation is justified by the Phelps argument that the inflation tax should be part of an optimal (distortionary) taxation scheme. This mainly happens because, unlike standard calibrations of public expenditures that focus on public consumption-to-GDP ratios, we also consider the diverse, highly distortionary effect of public transfers to households. Our prediction of the optimal inflation rate is broadly consistent with recent estimates of the Fed inflation target. We also contradict the view that the Ramsey-optimal policy should minimize inflation volatility over the business cycle and induce near-random walk dynamics of public debt in the long run. In fact optimal fiscal and monetary policies should stabilize long-run debt-to-GDP ratios in order to limit tax (and inflation) distortions in steady state. This latter result is strikingly similar to policy analyses in the aftermath of the 2008 financial crisis.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. 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.memotef.uniroma1.it/sites/dipartimento/files/wpapers/documenti/FullTextWP76.pdf
File Function: October 2010
Download Restriction: no

Bibliographic Info

Paper provided by Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF in its series Working Papers with number 76/10.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:rsq:wpaper:2/10

Contact details of provider:
Web page: http://www.memotef.uniroma1.it/RePEc/index.html
More information through EDIRC

Related research

Keywords: trend inflation; monetary and fiscal policy; Ramsey plan.;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Philip Ducaju & Erwan Gautier & Daphné Momferatou & Mélanie Ward-Warmedinge, 2008. "Institutional features of wage bargaining in 23 European countries, the US and Japan," Working Paper Research 154, National Bank of Belgium.
  2. Jesús Fernández-Villaverde & Juan F Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," Levine's Bibliography 843644000000000057, UCLA Department of Economics.
  3. Jordi Galí & Pau Rabanal, 2005. "Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 225-318 National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Alberto Bagnai, 2013. "Unhappy families are all alike: Minskyan cycles, Kaldorian growth, and the Eurozone peripheral crises," a/ Working Papers Series 1301, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
  2. Samuel Gil Martín, 2012. "Liquidity, Welfare and Distribution," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(2), pages 217-234, May.
  3. Acocella Nicola, 2013. "Teoria e pratica della politica economica: l'eredità del recente passato," Rivista di storia economica, Società editrice il Mulino, issue 2, pages 223-248.
  4. Nicola Acocella, . "A tale of two cities: exit policies in Washington and Frankfurt," Working Papers 117/13, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rsq:wpaper:2/10. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (isabella santini).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.