On the Optimal Inflation Rate

Markus Brunnermeier and Yuliy Sannikov

No 22133, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In our incomplete markets economy financial frictions affect the optimal inflation target. Households choose portfolios consisting of risky (uninsurable) capital and money. Money is a bubbly store of value. The market outcome is constrained Pareto inefficient due to a pecuniary externality. Each individual agent takes the real interest rate as given, while in the aggregate it is driven by the economic growth rate, which in turn depends on individual portfolio decisions. Higher inflation due to higher money growth lowers the real interest rate (on money) and tilts the portfolio choice towards physical capital investment. The optimal inflation target boosts growth and welfare and is higher for emerging market economies.

JEL-codes: E44 E51 E52 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: AP EFG IFM ME
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Citations: View citations in EconPapers (16)

Published as Markus K. Brunnermeier & Yuliy Sannikov, 2016. "On the Optimal Inflation Rate," American Economic Review, vol 106(5), pages 484-489.

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Journal Article: On the Optimal Inflation Rate (2016)
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