Pontiggia, Dario (2007): Inflation persistence and optimal positive long-run inflation.
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Within New Keynesian economics, the optimality of a monetary policy that aims at zero inflation is surprisingly robust. Optimal monetary policy has this character despite the inefficiency of the nonstochastic steady state and despite the existence of a positively sloped long-run Phillips-curve trade-off. Full price stability remains optimal even under inflation persistence due to backward-looking price indexation by price setters. We show how extending a basic New Keynesian model to the case of inflation persistence due to backward-looking rule-of-thumb behaviour by price setters breaks the surprising robustness of zero long-run inflation target, namely backward-looking rule-of-thumb behaviour by price setters results in optimal positive long-run inflation. Comparing different theoretical explanations for structural inflation persistence suggests that the features that seem capable of delivering an endogenously optimal inflation target are costly disinflation, long-run Phillips-curve trade-off, and steady-state distortions.
|Item Type:||MPRA Paper|
|Institution:||University of Glasgow, University of Milano-Bicocca|
|Original Title:||Inflation persistence and optimal positive long-run inflation|
|Keywords:||Optimal monetary policy; inflation persistence|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
|Depositing User:||Dario Pontiggia|
|Date Deposited:||22. Jun 2007|
|Last Modified:||24. Mar 2015 20:13|
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Inflation persistence and optimal positive long-run inflation. (deposited 18. May 2007)
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