Optimal Trend Inflation

Klaus Adam and Henning Weber

American Economic Review, 2019, vol. 109, issue 2, 702-37

Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (i) the optimal steady-state inflation rate generically differs from zero and (ii) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogeneous-firm model with sticky prices in closed form. Using firm-level data from the US Census Bureau, we estimate the historically optimal inflation path for the US economy: the optimal inflation rate ranges between 1 percent and 3 percent per year and displays a downward trend over the period 1977–2015.

JEL-codes: C51 D24 D25 E31 E52 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20171066
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Citations: View citations in EconPapers (38)

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Related works:
Working Paper: Optimal Trend Inflation (2018)
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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