The Optimal Rate of Inflation

Stephanie Schmitt-Grohe and Martín Uribe ()

No 16054, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Observed inflation targets around the industrial world are concentrated at two percent per year. This chapter investigates the extent to which the observed magnitudes of inflation targets are consistent with the optimal rate of inflation predicted by leading theories of monetary nonneutrality. We find that consistently those theories imply that the optimal rate of inflation ranges from minus the real rate of interest to numbers insignificantly above zero. Furthermore, we argue that the zero bound on nominal interest rates does not represent an impediment for setting inflation targets near or below zero.

JEL-codes: E31 E4 E5 (search for similar items in EconPapers)
Date: 2010-06
Note: EFG ME
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Citations: View citations in EconPapers (106)

Published as “The Optimal Rate of Inflation,” (with Mart ́ın Uribe), in Handbook of Monetary Economics edited by Benjamin M. Friedman and Michael Woodford, Volume 3B, Elsevier, San Diego CA, 2011, 653-722.

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Chapter: The Optimal Rate of Inflation (2010)
Working Paper: The Optimal Rate of Inflation (2010)
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