EconPapers    
Economics at your fingertips  
 

Estimating the Optimal Inflation Target from Trends in Relative Prices

Klaus Adam and Henning Weber

No 14335, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal inflation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative-price trends, we derive closed-form expressions for the optimal inflation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period.

Keywords: Micro price data; optimal inflation; U.K. inflation target (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in 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)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=14335 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Estimating the Optimal Inflation Target from Trends in Relative Prices (2020) Downloads
Working Paper: Estimating the optimal inflation target from trends in relative prices (2020) Downloads
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:cpr:ceprdp:14335

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=14335

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2021-01-18
Handle: RePEc:cpr:ceprdp:14335