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Optimal inflation for the U.S

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Author Info
Roberto M. Billi

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Abstract

What is the correctly measured inflation rate that monetary policy should aim for in the long-run? This paper characterizes the optimal inflation rate for the U.S. economy in a New Keynesian sticky-price model with an occasionally binding zero lower bound on the nominal interest rate. Real-rate and mark-up shocks jointly determine the optimal inflation rate to be positive but not large. Even allowing for the possibility of extreme model misspecification, the optimal inflation rate is robustly below 1 percent. The welfare costs of optimal inflation and the lower bound are limited.>

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 07-03.

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Date of creation: 2007
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Handle: RePEc:fip:fedkrw:rwp07-03

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Keywords: Inflation (Finance);

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  9. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-66, November.
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  18. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September. [Downloadable!] (restricted)
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  20. Lawrence Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
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  27. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roberto Billi, 2008. "Price-level targeting and risk management in a low-inflation economy," Research Working Paper RWP 08-09, Federal Reserve Bank of Kansas City. [Downloadable!]
  2. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28. [Downloadable!]
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