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Optimal Trend Inflation

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  • Adam, Klaus
  • Weber, Henning

Abstract

We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.

Suggested Citation

  • Adam, Klaus & Weber, Henning, 2017. "Optimal Trend Inflation," CEPR Discussion Papers 12160, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12160
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    References listed on IDEAS

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    Cited by:

    1. Antoine Lepetit, 2017. "The Optimal Inflation Rate with Discount Factor Heterogeneity," Working Papers hal-01527816, HAL.
    2. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The optimal inflation target and the natural rate of interest," Economics Working Papers 1591, Department of Economics and Business, Universitat Pompeu Fabra.

    More about this item

    Keywords

    Firm Heterogeneity; optimal inflation;

    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

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