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The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?

  • Olivier Coibion
  • Yuriy Gorodnichenko
  • Johannes Wieland

We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero lower bound, the optimal inflation rate is low, typically

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Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 4 ()
Pages: 1371-1406

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Handle: RePEc:oup:restud:v:79:y:2012:i:4:p:1371-1406
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  1. Michael T. Kiley, 2004. "Is moderate-to-high inflation inherently unstable?," Finance and Economics Discussion Series 2004-43, Board of Governors of the Federal Reserve System (U.S.).
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  12. Guido Ascari & Tiziano Ropele, 2005. "Trend Inflation, Taylor Principle and Indeterminacy," Working Papers 93, University of Milano-Bicocca, Department of Economics, revised Oct 2005.
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  16. repec:oup:qjecon:v:123:y:2008:i:4:p:1415-1464 is not listed on IDEAS
  17. Yuriy Gorodnichenko & Serena Ng, 2009. "Estimation of DSGE Models When the Data are Persistent," NBER Working Papers 15187, National Bureau of Economic Research, Inc.
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  19. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," Working Papers 91, Department of Economics, College of William and Mary.
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