 Nominal Rigidities and the Optimal Rate of InflationTorben M. Andersen ()
Economics Working Papers from Department of Economics and Business Economics, Aarhus University Abstract: Inflation may enhance the efficiency of the price system in the presence of nominal rigidities. For the price system to function efficiently there is a need for nominal prices to adjust both to real and nominal shocks for relative prices to disseminate the appropriate signals. Since the incentive for price setters to change prices depends not only on the costs of changing prices but also on the realized shocks, it follows that the rate of inflation may affect the incentive to change prices. The higher the rate of inflation the larger the incentive to change prices, and in the presence of real shocks requiring adjustment of relative prices this may lead to a better functioning price system. Empirical evidence supports that nominal rigidities are more prevalent at low rates of inflation. It follows that there cen be welfare costs of targeting inflation at too low a level. Keywords: Nominal rigidities; allocative efficiency; optimal rate of inflation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2000-19 Access Statistics for this paper More papers in Economics Working Papers from Department of Economics and Business Economics, Aarhus University |
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