Output-inflation trade-offs and the optimal inflation rate

Takushi Kurozumi and Willem Van Zandweghe

Journal of Economic Dynamics and Control, 2024, vol. 164, issue C

Abstract: We show that a positive superelasticity of demand, often referred to as “Marshall's Second Law of Demand,” is a new push factor of optimal inflation in staggered price models. The positive superelasticity alters the trade-offs between output and inflation in the models. It allows higher trend inflation to steepen the slope of a model-based Phillips curve and lower the steady-state average markup, and thus reduces the inflation-related weight in a model-based welfare function for higher trend inflation and the steady-state welfare cost of higher trend inflation. Consequently, the positive superelasticity can make the optimal trend inflation rate positive and lessen the welfare difference between inflation targets of 2 percent and 4 percent.

Keywords: Inflation target; Superelasticity of demand; Marshall's second law of demand; Staggered price-setting; Average markup; Welfare cost of inflation (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Working Paper: Output-Inflation Trade-offs and the Optimal Inflation Rate (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:164:y:2024:i:c:s0165188924000666

DOI: 10.1016/j.jedc.2024.104874

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