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The Optimal Long-Run Inflation Rate for the U.S. Economy

Author

Listed:
  • Roberto M. Billi

    () (FRB Kansas City)

Abstract

This paper characterizes the optimal long-run rate of inflation, consistent with an occasionally binding zero lower bound on nominal interest rates, in a stochastic New Keynesian sticky-price model calibrated to the U.S. economy. This may serve to inform discussions on the design of an (implicit) long-run inflation range or point target for the Federal Reserve System. It is shown that both demand and supply shocks, leading to an occasionally binding lower bound on nominal rates, determine a positive long-run rate of inflation to be optimal. Moreover, by applying the robust control approach envisaged by Hansen and Sargent, it is investigated if imperfect information and model uncertainty are a significant further determinant of a positive long-run inflation rate

Suggested Citation

  • Roberto M. Billi, 2006. "The Optimal Long-Run Inflation Rate for the U.S. Economy," Computing in Economics and Finance 2006 72, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:72
    as

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    More about this item

    Keywords

    nonlinear monetary policy; imperfect information; policy design; zero lower bound; inflation inertia;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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