Innovation and the Optimal Rate of Inflation

Henning Weber

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: Empirical data suggest that new rms tend to grow faster than incumbent firms in terms of their productivity. A sticky-price model with learning-by-doing in new firms fits this data and predicts that for plausible calibrations, the optimal long-run inflation rate is positive and between 0.5% and 1.5% per year. A positive long-run inflation rate helps the fast-growing new firms to align their real price with their idiosyncratic productivity growth. In contrast, the standard sticky-price model without learning-by-doing in new firms predicts an optimal long-run inflation rate near zero. In a two-sector model with learning-by-doing in new firms, the policy tradeoff that arises between new and incumbent firms is considerably more severe than the policy tradeoff that arises between economic sectors.

JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mac
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