IDEAS home Printed from
   My bibliography  Save this paper

Optimal Trend Inflation and Monetary Policy under Trending Relative Prices


  • Toyoichiro Shirota

    (Bank of Japan)


In the standard new Keynesian models, the optimal inflation rate is zero while the long-run inflation rate is non-zero positive in many countries. In this paper, we provide a new rationale for the non-zero trend inflation by utilizing the productivity gap between the intermediate-goods sector and the final-goods sector. The productivity gap among the sectors creates the relative price trend of the CPI and the PPI, which is observed in the actual data. Then, we show that the Ramsey-optimal inflation rate of the CPI is positive while that of the PPI is negative. In addition, the efficient allocation cannot be achieved under the productivity gap. Finally, we investigate the optimal monetary policy response to a shock under the trend inflation. Our results suggest that non-zero trend inflation dramatically alters the optimal monetary policy.

Suggested Citation

  • Toyoichiro Shirota, 2007. "Optimal Trend Inflation and Monetary Policy under Trending Relative Prices," Bank of Japan Working Paper Series 07-E-1, Bank of Japan.
  • Handle: RePEc:boj:bojwps:07-e-1

    Download full text from publisher

    File URL:
    Download Restriction: no


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

    Cited by:

    1. Alexander L. Wolman, 2011. "The Optimal Rate of Inflation with Trending Relative Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 355-384, March.
    2. Ikeda, Daisuke, 2015. "Optimal inflation rates with the trending relative price of investment," Journal of Economic Dynamics and Control, Elsevier, vol. 56(C), pages 20-33.

    More about this item


    Trend inflation; CPI; PPI; Optimal monetary policy; Relative price trend; Sectoral productivity gap;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boj:bojwps:07-e-1. 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: (Bank of Japan). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.