Learning By Doing in New Firms and the Optimal Rate of Inflation

Empirical data suggest that new fi rms tend to grow faster than incumbent firms in terms of their productivity. A sticky-price model with learning-by-doing in new firms fi ts this data and predicts that for plausible calibrations, the optimal long-run inflation rate is positive and between 0.5% and 1.5% per year. A positive long-run inflation rate helps the fast-growing new fi rms to align their real price with their idiosyncratic productivity growth. In contrast, the standard sticky-price model without learning-by-doing in new fi rms predicts an optimal long-run inflation rate near zero. In a two-sector model with learning-by-doing in new firms, the policy tradeo that arises between new and incumbent firms is considerably more severe than the policy tradeo that arises between economic sectors.