Hyperbolic Discounting and Positive Optimal Inflation

Liam Graham () and Dennis J. Snower ()
Additional contact information
Liam Graham: University College London
Dennis J. Snower: Hertie School of Governance

No 5694, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

Keywords: Phillips curve; unemployment; inflation targeting; optimal monetary policy; nominal inertia; monetary policy (search for similar items in EconPapers)
JEL-codes: E20 E40 E50 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2011-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Published - published in: Macroeconomic Dynamics, 2013,17 (3), 591-620.

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Related works:
Journal Article: HYPERBOLIC DISCOUNTING AND POSITIVE OPTIMAL INFLATION (2013)
Working Paper: Hyperbolic Discounting and Positive Optimal Inflation (2011)
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