The Optimal Inflation Rate under Schumpeterian Growth
Koki Oikawa () and
CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University
In this study, we analyze the relationship between inflation and economic growth. To this end, we construct a model of endogenous growth with creative destruction, incorporating sticky prices due to menu costs. Inflation and deflation reduce the reward for innovation via menu cost payments and, thus, lower the frequency of creative destruction. Central banks can maximize the rate of economic growth by setting their target inflation rate at the negative of a fundamental growth rate that would be realized without price stickiness. The optimal inflation rate, however, may differ from the growth-maximizing inflation rate because of overinvestment in R&D and indeterminacy. Both mechanisms indicate a higher optimal inflation rate than the negative of a fundamental growth rate. Our calibrated model shows that the optimal inflation rate is close to the growth-maximizing inflation rate and that a deviation from the optimal level has sizable impacts on economic growth.
Keywords: creative destruction; menu cost; new Keynesian; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E58 O33 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-gro, nep-mac and nep-mon
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Journal Article: The optimal inflation rate under Schumpeterian growth (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2015-14
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