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The optimal inflation rate revisited

Giovanni Di Bartolomeo (), Patrizio Tirelli () and Nicola Acocella

No 208, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We challenge the widely held belief that New-Keynesian models cannot predict optimal positive in‡ ations. We finnd that these are justified by the Phelps argument. This mainly happens because we also consider distortionary expects of public transfers. Our predictions are broadly consistent with recent estimates of the Fed inflation targets. We also contradict theview that the Ramsey policy should minimize inflation volatility and induce near-random walk dynamics of public debt in the long-run. It should instead stabilize debt-to-GDP ratios to mitigate steady-state distortions. This latter result is strikingly similar to policy analyses in the aftermath of the 2008 crisis.

Keywords: trend inflation; monetary and fiscal policy; Ramsey plan. (search for similar items in EconPapers)
JEL-codes: E52 E58 J51 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2011-03, Revised 2011-03
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http://repec.dems.unimib.it/repec/pdf/mibwpaper208.pdf First version, 2011 (application/pdf)

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