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The Optimal Inflation Target

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  • Klaus Adam
  • Henning Weber

Abstract

We review the academic literature investigating the economic determinants of the welfare optimal inflation target. We start with a bird’s-eye review of the academic literature covering the past 60 years. Up to the year 2010, the academic literature recommended optimal inflation targets that are either negative or zero. The subsequent literature incorporated new economic features and can rationalize also positive inflation targets. In our review, we discuss these features, especially the role of (i) productivity and unaccounted quality progress, (ii) the lowerbound constraint on nominal rates, (iii) nominal wage rigidity, and (iv) product turnover and product aggregation. In a final setup, we provide suggestions for further research on the topic.

Suggested Citation

  • Klaus Adam & Henning Weber, 2024. "The Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2024_572, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_572
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    References listed on IDEAS

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    5. Mineyama, Tomohide, 2022. "Revisiting the optimal inflation rate with downward nominal wage rigidity: The role of heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
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    More about this item

    Keywords

    optimal inflation; Ramsey policy; optimal rules; lower-bound constraint; wage rigidity; relative price trends;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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    This paper has been announced in the following NEP Reports:

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