The Case for a Positive Euro Area Inflation Target: Evidence From France, Germany and Italy

Klaus Adam, Erwan Gautier, Sergio Santoro and Henning Weber

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive in flation target. Relative price trends shift the optimal infl ation target up from a level of zero percent, as suggested by the standard sticky price literature, to a range of 1.1%- 2.1% in France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in the Euro Area (three country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal infl ation targets further. The welfare costs associated with targeting zero infl ation turn out to be substantial and range between 2.1% and 4.5% of consumption in present-value terms.

Keywords: Optimal in ation target; micro price trends; welfare (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 42
Date: 2021-08
New Economics Papers: this item is included in nep-isf and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.crctr224.de/research/discussion-papers/archive/dp317 (application/pdf)

Related works:
Journal Article: The case for a positive euro area inflation target: Evidence from france, germany and italy (2022)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021)
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021)
Working Paper: The case for a positive euro area inflation target: evidence from France, Germany and Italy (2021)
Working Paper: The case for a positive euro area inflation target: Evidence from France, Germany and Italy (2021)
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:bon:boncrc:crctr224_2021_317

Access Statistics for this paper

More papers in CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany Kaiserstr. 1, 53113 Bonn , Germany.
Bibliographic data for series maintained by CRC Office ().