Hyperbolic Discounting and Positive Optimal Inflation

Dennis Snower and Liam Graham

No 8390, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al. (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

Keywords: Inflation targeting; Monetary policy; Nominal inertia; Optimal monetary policy; Phillips curve; Unemployment (search for similar items in EconPapers)
JEL-codes: E20 E40 E50 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: HYPERBOLIC DISCOUNTING AND POSITIVE OPTIMAL INFLATION (2013)
Working Paper: Hyperbolic Discounting and Positive Optimal Inflation (2011)
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