The case for a positive euro area inflation target: Evidence from France, Germany and Italy

Klaus Adam, Erwan Gautier, Sergio Santoro and Henning Weber

No 26/2021, Discussion Papers from Deutsche Bundesbank

Abstract: Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive inflation target. Relative price trends shift the optimal in ation target up from a level of zero percent, as suggested by the standard sticky price literature, to a range of 1.1%- 2.1% in France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in the Euro Area (three country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation turn out to be substantial and range between 2.1% and 4.5% of consumption in present-value terms.

Keywords: Optimal inflation target; micro price trends; welfare (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-isf, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The case for a positive euro area inflation target: Evidence from france, germany and italy (2022)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence From France, Germany and Italy (2021)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021)
Working Paper: The case for a positive euro area inflation target: evidence from France, Germany and Italy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:262021

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