What is the optimal inflation rate?
Roberto Billi and
George Kahn ()
Economic Review, 2008, issue Q II, No v. 93, no. 2, 5-28
With inflation in the United States and elsewhere low by historical standards, the question of what inflation rate policymakers should aim for has moved front and center. Knowing what inflation rate to aim for is critically important for maximizing the economic well-being of the public. ; Most policymakers agree they should not allow inflation to fall below zero because the costs of deflation are thought to be high. They disagree, however, about how much above zero, if any, central banks should aim to keep inflation. Unfortunately, rigorous estimates of an "optimal inflation rate" have not been available in the economics literature. ; Billi and Kahn provide estimates of the optimal inflation rate. Based on a standard, modern macroeconomic model calibrated to U.S. data, they estimate the optimal inflation rate to be 0.7 to 1.4 percent per year as measured by the PCE price index. This estimate is the first to be based on an economic model in which policymakers are assumed explicitly to maximize the economic well-being of the public. Further research is required to confirm or refine these results using models that incorporate a richer array of possible interactions between the long-run inflation objective and economic stability.
Keywords: Inflation; (Finance) (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (25) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedker:y:2008:i:qii:p:5-28:n:v.93no.2
Ordering information: This journal article can be ordered from
Access Statistics for this article
More articles in Economic Review from Federal Reserve Bank of Kansas City One Memorial Drive, Kansas City, MO 64198. Contact information at EDIRC.
Series data maintained by LDayrit ().