The optimal inflation rate and firm-level productivity growth

Henning Weber

No 1773, Kiel Working Papers from Kiel Institute for the World Economy

Abstract: Empirical data show that firms tend to improve their ranking in the productivity distribution over time. A stickyprice model with firm-level productivity growth fits this data and predicts that the optimal long-run inflation rate is positive and between 1.5% and 2% per year. In contrast, the standard sticky-price model cannot fit this data and predicts optimal long-run inflation near zero. Despite positive long-run inflation, the Taylor principle ensures determinacy in the model with firm-level productivity growth, and optimal inflation stabilization policies are standard. In a two-sector extension of this model, the optimal long-run inflation rate weights the sector with the stickier prices more heavily.

Keywords: optimal monetary policy; indeterminacy; heterogenous firms; firm entry and exit (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E61 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1773

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