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Optimal trend inflation

Klaus Adam () and Henning Weber

No 579, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We present a sticky-price model incorporating heterogeneous Firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous Firms: (1) the optimal steady-state inflation rate generically differs from zero and, (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.

Keywords: optimal inflation rate; sticky prices; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: E52 E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

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Related works:
Journal Article: Optimal Trend Inflation (2019) Downloads
Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal Trend Inflation (2018) Downloads
Working Paper: Optimal Trend Inflation (2017) Downloads
Working Paper: Optimal trend inflation (2017) Downloads
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