The Optimal Rate of Inflation

Stephanie Schmitt-Grohe and Martín Uribe ()

Chapter 13 in Handbook of Monetary Economics, 2010, vol. 3, pp 653-722 from Elsevier

Abstract: Observed inflation targets around the industrial world are concentrated at two percent per year. This chapter investigates the extent to which the observed magnitudes of inflation targets are consistent with the optimal rate of inflation predicted by leading theories of monetary non-neutrality. We find that consistently those theories imply that the optimal rate of inflation ranges from minus the real rate of interest to numbers insignificantly above zero. Furthermore, we argue that the zero bound on nominal interest rates does not represent an impediment for setting inflation targets near or below zero. Finally, we find that central banks should adjust their inflation targets upward by the size of the quality bias in measured inflation only if hedonic prices are more sticky than nonquality-adjusted prices.

Keywords: Downward Nominal Rigidities; Foreign Demand for Money; Friedman Rule; Quality Bias; Ramsey Policy; Sticky-Prices; Zero Bound (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
Date: 2010
ISBN: 978-0-444-53470-5
References: Add references at CitEc
Citations: View citations in EconPapers (78)

Downloads: (external link)
http://www.sciencedirect.com/science/article/B7P60 ... 454b85c92a52962e77d3
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Optimal Rate of Inflation (2010)
Working Paper: The Optimal Rate of Inflation (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:monchp:3-13

Access Statistics for this chapter

More chapters in Handbook of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().