Optimal Trend Inflation

Klaus Adam and Henning Weber

No 782, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady- state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to es- timate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Optimal Trend Inflation (2019)
Working Paper: Optimal Trend Inflation (2018)
Working Paper: Optimal Trend Inflation (2018)
Working Paper: Optimal Trend Inflation (2018)
Working Paper: Optimal Trend Inflation (2017)
Working Paper: Optimal trend inflation (2017)
Working Paper: Optimal trend inflation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:782

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