Pontiggia, Dario (2007): Inflation persistence and optimal positive long-run inflation.
Download (249Kb) | Preview
In this paper we prove that (I) inefficient natural level of output (Friedman (1968)), (II) central bank's desire to stabilize output around a level that is higher than the inefficient natural level of output, (III) long-run Phillips curve trade-off, and (IV) inflation persistence result in optimal positive long-run inflation. The combination of (I), (II), and (III) makes positive inflation forever in principles desirable as it would result in positive output gap forever. Optimal positive steady-state inflation obtains if and only if there is a long-run incentive for positive inflation. Inflation persistence, defined as costly, in terms of output, disinflation, generates a long-run incentive for positive inflation. Optimal positive steady-state inflation obtains in the basic neo-Wicksellian model (Woodford (2003)) with inflation persistence due to backward-looking rule-of-thumb behaviour by price setters. Optimal positive long-run inflation also obtains in what we refer to as the nonmicrofounded model. Prescinding from hyperinflation, the formula for steady-state inflation is capable of providing a positive theory of inflation.
|Item Type:||MPRA Paper|
|Original Title:||Inflation persistence and optimal positive long-run inflation|
|Keywords:||Optimal monetary policy; inflation persistence|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation|
|Depositing User:||Dario Pontiggia|
|Date Deposited:||18. May 2007|
|Last Modified:||19. Feb 2013 05:10|
Altissimo, F., M. Ehrmann, and F. Smets (2006). Inflation persistence and price-setting behaviour in the Euro Area: a summary of the IPN evidence. European Central Bank Occasional Paper Series. No. 46. Ascari, G. and Ropele T. (2007). Optimal monetary policy under low trend inflation. Journal of Monetary Economics, forthcoming. Amato, J. and T. Laubach (2003). Rule-of-thumb behaviour and monetary policy. European Economic Review 47, 791-831. Barro, R. and D. Gordon (1983). A positive theory of monetary policy in a natural-rate model. Journal of Political Economy 91, 589-610. Benigno, P. and M. Woodford (2005). Inflation stabilization and welfare: the case of a distorted steady state. Journal of the European Economics Association 3, 1185-1236. Calvo, G. (1983). Staggered prices in a utility-maximising framework. Journal of Monetary Economics 12, 383-398. Christiano, L., M. Eichenbaum, and C. Evans (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1-45. Dixit, A. and Stiglitz J. (1977). Monopolistic competition and optimum product diversity. American Economic Review 67, 297-308. Frankel, J. and Froot K. (1990). Chartists, fundamentalists, and trading in the foreign exchange market. American Economic Review 80, 181-185. Friedman , M. (1968). The role of monetary policy. American Economic Review 58, 1-17. Galì, J. and M. Gertler (1999). Inflation dynamics: a structural econometric analysis. Journal of Monetary Economics 44, 195-222. Kidland, F. and E. Prescott (1977). Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85, 473-491. Roberts, J. (1995). New Keynesian economics and the Phillips curve. Journal of Money, Credit and Banking 27, 975-984. Schmitt-Grohé, S. and M. Uribe (2005). Optimal inflation stabilization in a medium-scale macroeconomic model. NBER Working Paper, No. 11854. Steinsson, J. (2003). Optimal monetary policy in an economy with inflation persistence. Journal of Monetary Economics 50, 1425-1456. Walsh, C. (2003). Monetary Theory and Policy. MIT Press. Woodford, M. (1999). Commentary: how should monetary policy be conducted in an era of price stability? New Challenges for Monetary Policy. Federal Reserve Bank of Kansas City. Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.
Available Versions of this Item
- Inflation persistence and optimal positive long-run inflation. (deposited 18. May 2007) [Currently Displayed]