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The Optimal Long-Run Inflation Rate for the U.S. Economy

Roberto Billi

No 72, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: This paper characterizes the optimal long-run rate of inflation, consistent with an occasionally binding zero lower bound on nominal interest rates, in a stochastic New Keynesian sticky-price model calibrated to the U.S. economy. This may serve to inform discussions on the design of an (implicit) long-run inflation range or point target for the Federal Reserve System. It is shown that both demand and supply shocks, leading to an occasionally binding lower bound on nominal rates, determine a positive long-run rate of inflation to be optimal. Moreover, by applying the robust control approach envisaged by Hansen and Sargent, it is investigated if imperfect information and model uncertainty are a significant further determinant of a positive long-run inflation rate

Keywords: nonlinear monetary policy; imperfect information; policy design; zero lower bound; inflation inertia (search for similar items in EconPapers)
JEL-codes: C63 E31 E52 (search for similar items in EconPapers)
Date: 2006-07-04
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