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The Optimal Inflation Rate with Discount Factor Heterogeneity

Antoine Lepetit

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Abstract: This paper considers a framework in which the relevant frictions faced by the monetary authority are price stickiness and monopolistic competition, and shows that deviations from long-run price stability are optimal in the presence of discount factor heterogeneity. I derive analytical solutions for the optimal inflation rate in two different cases. First, in a standard New Keynesian model in which the heterogeneity in discount factors is imposed exogenously. Second, in a model with a perpetual youth structure in which it arises endogenously. I find that the optimal inflation rate is positive when the social discount factor is greater than the discount factor used by firms when evaluating profit flows, zero when the two are equal, and negative when the planner is more impatient than firms. A baseline calibration of the perpetual youth model suggests values of the optimal inflation rate comprised between 0.2% and 1%.

Keywords: sticky prices; discount factor heterogeneity; optimal inflation rate (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2017-05-25
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