Optimal inflation rates with the trending relative price of investment

Daisuke Ikeda

Journal of Economic Dynamics and Control, 2015, vol. 56, issue C, 20-33

Abstract: I study the effect of the trending relative price of investment on the optimal target rate of inflation in an estimated dynamic general equilibrium model of the U.S. economy. The price of investment has a decreasing trend relative to that of consumption because of investment-specific technological progress. If the prices of investment goods are sticky, a benevolent planner puts weight on stabilizing these prices, which works to raise the optimal target rate of inflation in terms of the price of consumption. The estimated model shows a high degree of price stickiness in an investment sector and the resulting optimal target rate of inflation is significantly positive. This result is robust to an extended model in which the prices of some categories of investment goods are flexible.

Keywords: Optimal inflation rates; Trend inflation; Sticky prices; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:56:y:2015:i:c:p:20-33

DOI: 10.1016/j.jedc.2015.04.003

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