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

Klaus Adam, Erwan Gautier, Sergio Santoro and Henning Weber

No 16828, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Using the micro price data underlying the Harmonized Index of Consumer Prices, we estimate relative price trends over the product life cycle in France, Germany and Italy. We show that minimizing the welfare consequences of relative price distortions in the presence of these trends requires targeting a significantly positive inflation rate: the steady-state inflation rate jointly maximizing welfare in all three countries ranges between 1.1%-1.7%. The optimal target range for individual countries is 1.1%-2.1% in France, 1.2%-2.0% in Germany and 0.8%-1.0% in Italy. Differences across countries emerge due to systematic differences in the strength of relative price trends. The welfare costs associated with targeting an inflation rate of zero in the Euro Area, as suggested by standard monetary models without relative price trends, amount to 4.5% of consumption in present-value terms.

Keywords: Welfare; Optimal inflation target; Micro price trends (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2021-12
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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)
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