Optimal Inflation Rates in a Non-linear New Keynesian Model: The Case of Japan and the United States

Tomohide Mineyama, Wataru Hirata and Kenji Nishizaki
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Tomohide Mineyama: International Monetary Fund
Kenji Nishizaki: Bank of Japan

International Journal of Central Banking, 2022, vol. 18, issue 3, 1-45

Abstract: We investigate the optimal inflation rate using a New Keynesian model subject to non-linearity arising from downward nominal wage rigidity (DNWR) and prolonged spells of the zero lower bound of nominal interest rates (ZLB). We rigorously evaluate the model non-linearity and calibrate the model to the Japanese and U.S. economies. We find that the optimal inflation rate is close to 2 percent for both countries, though the main driver differs by country: ZLB for Japan, but DNWR for the United States. In addition, around 1 percentage point absolute deviation from the rate of close to 2 percent induces only a minor change in social welfare.

JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Date: 2022
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