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The optimal inflation target in an economy with limited enforcement

Gaetano Antinolfi (), Costas Azariadis () and James Bullard

No 2012-044, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We formulate the central bank?s problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income and public information. Households are segmented into cash agents, who store value in currency alone, and credit agents who have access to both currency and loans. The planner?s problem is equivalent to choosing inflation and nominal interest rates consistent with a resource constraint, and with an incentive constraint that ensures credit agents prefer the superior consumption- smoothing power of loans to that of currency. We show that the optimum inflation rate is positive, because inflation reduces the value of the outside option for credit agents and raises their debt limits.

Keywords: Inflation targeting; Deflation (Finance); Monetary policy (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: THE OPTIMAL INFLATION TARGET IN AN ECONOMY WITH LIMITED ENFORCEMENT (2016) Downloads
Working Paper: The optimal inflation target in an economy with limited enforcement (2008) Downloads
Working Paper: The optimal inflation target in an economy with limited enforcement (2008) Downloads
Working Paper: The Optimal Inflation Target in an Economy with Limited Enforcement (2008)
Working Paper: The optimal inflation target in an economy with limited enforcement (2007) Downloads
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