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Optimal Trend Inflation

The American economic review, 2019-02, Vol.109 (2), p.702-737 [Peer Reviewed Journal]

Copyright American Economic Association Feb 2019 ;ISSN: 0002-8282 ;EISSN: 1944-7981 ;DOI: 10.1257/aer.20171066

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  • Title:
    Optimal Trend Inflation
  • Author: Adam, Klaus ; Weber, Henning
  • Subjects: Census ; Displays ; Economic models ; Inflation ; Inflation rates ; Prices ; Productivity ; Sticky prices ; Trends
  • Is Part Of: The American economic review, 2019-02, Vol.109 (2), p.702-737
  • Description: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (i) the optimal steady-state inflation rate generically differs from zero and (ii) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogeneous-firm model with sticky prices in closed form. Using firm-level data from the US Census Bureau, we estimate the historically optimal inflation path for the US economy: the optimal inflation rate ranges between 1 percent and 3 percent per year and displays a downward trend over the period 1977–2015.
  • Publisher: Nashville: American Economic Association
  • Language: English
  • Identifier: ISSN: 0002-8282
    EISSN: 1944-7981
    DOI: 10.1257/aer.20171066
  • Source: AUTh Library subscriptions: ProQuest Central
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