The optimal inflation rate revisited
We challenge the widely held belief that New-Keynesian models cannot predict optimal positive inâ€¡ ations. We finnd that these are justified by the Phelps argument. This mainly happens because we also consider distortionary expects of public transfers. Our predictions are broadly consistent with recent estimates of the Fed inflation targets. We also contradict theview that the Ramsey policy should minimize inflation volatility and induce near-random walk dynamics of public debt in the long-run. It should instead stabilize debt-to-GDP ratios to mitigate steady-state distortions. This latter result is strikingly similar to policy analyses in the aftermath of the 2008 crisis.
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|Date of revision:||Mar 2011|
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- Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007.
"How Structural Are Structural Parameters?,"
NBER Working Papers
13166, National Bureau of Economic Research, Inc.
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"Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan,"
IZA Discussion Papers
3867, Institute for the Study of Labor (IZA).
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- Du Caju, Philip & Gautier, Erwan & Momferatou, Daphne & Ward-Warmedinger, Melanie, 2008. "Institutional features of wage bargaining in 23 European countries, the US and Japan," Working Paper Series 0974, European Central Bank.
- Du Caju, Ph. & Gautier, E. & Momferatou, D. & Ward-Warmedinger, M., 2008. "Institutional features of wage bargaining in 23 European countries, the US and Japan," Working papers 228, Banque de France.
- Jordi Galí & Pau Rabanal, 2005. "Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 225-318 National Bureau of Economic Research, Inc.
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