Optimal trend inflation

  • 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.

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Metadaten
Author:Klaus AdamORCiDGND, Henning WeberGND
URN:urn:nbn:de:hebis:30:3-438653
URL:https://ssrn.com/abstract=3043109
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 579
Series (Serial Number):CFS working paper series (579)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2017/10/17
Tag:firm heterogeneity; optimal inflation rate; sticky prices
Issue:July 12, 2017
Page Number:78
HeBIS-PPN:41915437X
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht