The Optimal Rate of Inflation

Martín Uribe () and Schmitt-Grohé, Stephanie
Authors registered in the RePEc Author Service: Stephanie Schmitt-Grohe

No 7864, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Observed inflation targets around the industrial world are concentrated at two percent per year. This paper investigates the extent to which the observed magnitudes of inflation targets are consistent with the optimal rate of inflation predicted by leading theories of monetary non-neutrality. We find that consistently those theories imply that the optimal rate of inflation ranges from minus the real rate of interest to numbers insignificantly above zero. Furthermore, we argue that the zero bound on nominal interest rates does not represent an impediment for setting inflation targets near or below zero. Finally, we find that central banks should adjust their inflation targets upward by the size of the quality bias in measured inflation only if hedonic prices are more sticky than are non-quality-adjusted prices.

Keywords: Downward nominal rigidities; Foreign demand for money; Friedman rule; Quality bias; Ramsey policy; Sticky-prices; Zero bound (search for similar items in EconPapers)
JEL-codes: E31 E4 E5 (search for similar items in EconPapers)
Date: 2010-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (103)

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Related works:
Chapter: The Optimal Rate of Inflation (2010)
Working Paper: The Optimal Rate of Inflation (2010)
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