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Optimal inflation for the U.S

Listed author(s):
  • Roberto M. Billi

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.>

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File URL: http://www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/RWP07-03.pdf
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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 07-03.

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Date of creation: 2007
Handle: RePEc:fip:fedkrw:rwp07-03
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