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The optimal inflation rate revisited

  • Giovanni Di Bartolomeo

    ()

  • Patrizio Tirelli

    ()

  • Nicola Acocella

    ()

We challenge the widely held belief that New-Keynesian models cannot predict optimal positive in‡ 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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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper208.pdf
File Function: First version, 2011
Download Restriction: no

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 208.

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Length: 26 pages
Date of creation: Mar 2011
Date of revision: Mar 2011
Handle: RePEc:mib:wpaper:208
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  1. Philip Ducaju & Erwan Gautier & Daphné Momferatou & Mélanie Ward-Warmedinge, 2008. "Institutional features of wage bargaining in 23 European countries, the US and Japan," Working Paper Research 154, National Bank of Belgium.
  2. 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.
  3. 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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