Inflation and Social Welfare in a New Keynesian Model: The Case of Japan and the U.S
Tomohide Mineyama (),
Wataru Hirata and
Additional contact information
Wataru Hirata: Bank of Japan
Kenji Nishizaki: Bank of Japan
No 19-E-10, Bank of Japan Working Paper Series from Bank of Japan
In this paper, we investigate the steady-state inflation rate that maximizes social welfare in a New Keynesian model. We calibrate the model on the Japanese and the U.S. economies, and we solve the model employing a computation method that addresses the non-linear dynamics associated with four major factors affecting the costs and benefits of inflation: (i) nominal price rigidity; (ii) money holdings; (iii) downward nominal wage rigidity (DNWR); and (iv) the zero lower bound of the nominal interest rates (ZLB). The calibrated model suggests the steady-state inflation rate that maximizes social welfare is close to two percent for both Japan and the U.S., though the main driver differs by country: the ZLB for Japan, but the DNWR for the U.S. In addition, around one percentage point absolute deviation from the close-to-two-percent rate induces only a minor change in social welfare. We also find that the lower-end of the range that is acceptable in terms of welfare losses is reduced when we introduce forward guidance in monetary policy through which private agents anticipate a prolonged zero interest rate once the ZLB binds. The estimates of the steady-state inflation rate are subject to a considerable margin of error due to parameter uncertainty in ZLB parameterization.
Keywords: Inflation; Social welfare; New Keynesian model; Downward nominal wage rigidity; Zero lower bound; Forward guidance (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:wp19e10
Access Statistics for this paper
More papers in Bank of Japan Working Paper Series from Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Bank of Japan ().