The Optimal Inflation Target

We review the academic literature investigating the economic determinants of the welfare optimal inflation target. We start with a bird’s-eye review of the academic literature covering the past 60 years. Up to the year 2010, the academic literature recommended optimal inflation targets that are either negative or zero. The subsequent literature incorporated new economic features and can rationalize also positive inflation targets. In our review, we discuss these features, especially the role of (i) productivity and unaccounted quality progress, (ii) the lowerbound constraint on nominal rates, (iii) nominal wage rigidity, and (iv) product turnover and product aggregation. In a final setup, we provide suggestions for further research on the topic.