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The optimal inflation rate under Schumpeterian growth

Koki Oikawa () and Kozo Ueda

Journal of Monetary Economics, 2018, vol. 100, issue C, 114-125

Abstract: To analyze the relationship between inflation and economic growth, we construct an endogenous growth model with creative destruction, incorporating sticky prices due to menu costs. Price changes reduce the reward for innovation and thus lower the frequency of creative destruction. Central banks can maximize the growth rate by setting their inflation target at the negative of a fundamental growth rate. While the optimal inflation rate may be greater than the growth-maximizing inflation rate, our calibrated model shows that the optimal inflation rate is close to the growth-maximizing inflation rate and that a deviation from the optimal level has sizable impacts.

Keywords: Creative destruction; Menu cost; New Keynesian; Monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E58 O33 O41 (search for similar items in EconPapers)
Date: 2018
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Working Paper: The Optimal Inflation Rate under Schumpeterian Growth (2015) Downloads
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Handle: RePEc:eee:moneco:v:100:y:2018:i:c:p:114-125