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Optimal inflation for the U.S

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  • Roberto M. Billi

Abstract

What is the correctly measured inflation rate that monetary policy should aim for in the long-run? This paper characterizes the optimal inflation rate for the U.S. economy in a New Keynesian sticky-price model with an occasionally binding zero lower bound on the nominal interest rate. Real-rate and mark-up shocks jointly determine the optimal inflation rate to be positive but not large. Even allowing for the possibility of extreme model misspecification, the optimal inflation rate is robustly below 1 percent. The welfare costs of optimal inflation and the lower bound are limited.>

Suggested Citation

  • Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp07-03
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    Cited by:

    1. Guerron-Quintana, Pablo A., 2011. "The implications of inflation in an estimated new Keynesian model," Journal of Economic Dynamics and Control, Elsevier, pages 947-962.
    2. 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.
    3. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, pages 1-20.
    4. Roberto M. Billi, 2008. "Price-level targeting and risk management in a low-inflation economy," Research Working Paper RWP 08-09, Federal Reserve Bank of Kansas City.
    5. S. Boragan Aruoba & Frank Schorfheide, 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs," American Economic Journal: Macroeconomics, American Economic Association, pages 60-90.
    6. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, pages 1-20.
    7. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28.
    8. Guerron-Quintana, Pablo A., 2011. "The implications of inflation in an estimated new Keynesian model," Journal of Economic Dynamics and Control, Elsevier, pages 947-962.
    9. Vadim Khramov & John Ridings Lee, 2013. "The Economic Performance Index (EPI); an Intuitive Indicator for Assessing a Country's Economic Performance Dynamics in an Historical Perspective," IMF Working Papers 13/214, International Monetary Fund.
    10. Billi, Roberto M., 2012. "Output Gaps and Robust Monetary Policy Rules," Working Paper Series 260, Sveriges Riksbank (Central Bank of Sweden).
    11. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, pages 679-739.
    12. Pavasuthipaisit, Robert, 2009. "Optimal exchange-rate policy in a low interest rate environment," Journal of the Japanese and International Economies, Elsevier, pages 264-282.
    13. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2011. "CONDI: A Cost-of-Nominal-Distortions Index," American Economic Journal: Macroeconomics, American Economic Association, pages 53-91.
    14. Bennett T. McCallum, 2011. "Should central banks raise their inflation targets? Some relevant issues," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 111-131.
    15. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Working Paper Series 2009-03, Federal Reserve Bank of San Francisco.
    16. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2011. "CONDI: A Cost-of-Nominal-Distortions Index," American Economic Journal: Macroeconomics, American Economic Association, pages 53-91.

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    Keywords

    Inflation (Finance);

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