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Optimal Inflation Rates in a Non-linear New Keynesian Model: The Case of Japan and the United States

Author

Listed:
  • Tomohide Mineyama

    (International Monetary Fund)

  • Wataru Hirata

    (Bank of Japan)

  • Kenji Nishizaki

    (Bank of Japan)

Abstract

We investigate the optimal inflation rate using a New Keynesian model subject to non-linearity arising from downward nominal wage rigidity (DNWR) and prolonged spells of the zero lower bound of nominal interest rates (ZLB). We rigorously evaluate the model non-linearity and calibrate the model to the Japanese and U.S. economies. We find that the optimal inflation rate is close to 2 percent for both countries, though the main driver differs by country: ZLB for Japan, but DNWR for the United States. In addition, around 1 percentage point absolute deviation from the rate of close to 2 percent induces only a minor change in social welfare.

Suggested Citation

  • Tomohide Mineyama & Wataru Hirata & Kenji Nishizaki, 2022. "Optimal Inflation Rates in a Non-linear New Keynesian Model: The Case of Japan and the United States," International Journal of Central Banking, International Journal of Central Banking, vol. 18(3), pages 1-45, September.
    • Handle: RePEc:ijc:ijcjou:y:2022:q:3:a:1
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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