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Optimal Trend Inflation

Klaus Adam and Henning Weber

No 12160, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.

Keywords: Firm Heterogeneity; optimal inflation (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017-07
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Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal trend inflation (2017) Downloads
Working Paper: Optimal trend inflation (2017) Downloads
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