Foreign Demand for Domestic Currency and the Optimal Rate of Inflation

Stephanie Schmitt‐grohé and Martín Uribe
Authors registered in the RePEc Author Service: Stephanie Schmitt-Grohe

Journal of Money, Credit and Banking, 2012, vol. 44, issue 6, 1207-1224

Abstract: We characterize the Ramsey optimal rate of inflation in a model with a foreign demand for domestic currency. In the absence of such demand, the model implies that the Friedman rule—deflation at the real rate of interest—is optimal. We show analytically that in the presence of a foreign demand for domestic currency, this result breaks down. Calibrated versions of the model deliver optimal annual rates of inflation between 2% and 10%. The domestically benevolent government imposes an inflation tax to extract resources from the rest of the world in the form of seignorage revenue.

Date: 2012
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Citations: View citations in EconPapers (3)

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https://doi.org/10.1111/j.1538-4616.2012.00528.x

Related works:
Journal Article: Foreign Demand for Domestic Currency and the Optimal Rate of Inflation (2012)
Working Paper: Foreign Demand for Domestic Currency and the Optimal Rate of Inflation (2009)
Working Paper: Foreign Demand for Domestic Currency and the Optimal Rate of Inflation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:44:y:2012:i:6:p:1207-1224

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