Optimal inflation, monetary integration, and asymmetric sticky prices

Wojtek PaczosBy
Authors registered in the RePEc Author Service: Wojtek Paczos

Oxford Economic Papers, 2020, vol. 72, issue 3, 710-730

Abstract: This article explores the optimal rate of trend inflation in open economies with and without a monetary union, accounting for empirically observed differences in the degree of price stickiness across countries. In a closed economy, the optimal inflation rate is negative to offset the markup caused by imperfect competition. In an open economy there is a ‘beggar-thy-neighbour’ incentive and the optimal inflation is positive. Monetary union is globally welfare improving because it removes this externality. In both setups, as price stickiness increases, the degree of price dispersion increases, and the optimal inflation rate tends towards zero. Gains from monetary integration are higher for economies with more flexible prices.

JEL-codes: E52 F41 F42 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Optimal Inflation, Average Markups and Asymmetric Sticky Prices (2016)
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