A Note on Intrinsic Inflation Persistence and the Optimal Inflation Rate
DOI:
https://doi.org/10.6000/1929-7092.2016.05.21Keywords:
Optimal monetary policy, Phillips curve, inflation persistenceAbstract
This paper examines the implications of intrinsic inflation persistence, namely inertia that inflation inherits from its own past, on the conduct of optimal monetary policy. We study the optimal long-run rate of inflation in a basic New Keynesian model, which is augmented for intrinsic inflation persistence. We show that the commitment solution for the monetary authority leads to steady-state outcomes in which inflation is positive.References
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http://dx.doi.org/10.1086/261167
Ball, Laurence M. 2013. ""The Case for Four Percent Inflation."" Central Bank Review 13:17-31.
Ball, Laurence M. 1994. ""Credible Disinflation with Staggered Price Setting."" American Economic Review 84:282-289.
Blanchard, Olivier, Giovanni Dell'Ariccia and Paolo Mauro. 2010. ""Rethinking Macroeconomic Policy."" Journal of Money, Credit, and Banking 42:199-215.
http://dx.doi.org/10.1111/j.1538-4616.2010.00334.x
Blanchard, Olivier and Jordi Galí. 2007. ""Real Wage Rigidities and the New Keynesian Model."" Journal of Money, Credit, and Banking 39:35-65.
http://dx.doi.org/10.1111/j.1538-4616.2007.00015.x
Calvo, Guillermo A. 1983. ""Staggered Prices in a Utility-Maximising Framework."" Journal of Monetary Economics 12:383-398.
http://dx.doi.org/10.1016/0304-3932(83)90060-0
Christiano, Lawrence M., and Martin Eichenbaum and Charles L. Evans. 2005. ""Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy."" Journal of Political Economy 113:1-45.
http://dx.doi.org/10.1086/426038
Fisher, Irving. 1933. ""The Debt-Deflation Theory of Great Depressions."" Econometrica 1:337-357.
http://dx.doi.org/10.2307/1907327
Fuhrer, Jeffrey C. 2010. ""Inflation Persistence"" Pp. 423-486 in Handbook of Monetary Economics, edited by B. Friedman and M. Woodford. Elsevier.
http://dx.doi.org/10.1016/b978-0-444-53238-1.00009-0
Fuhrer, Jeffrey C. and George Moore. 1995. ""Inflation Persistence."" Quarterly Journal of Economics 110:127-159.
http://dx.doi.org/10.2307/2118513
Friedman, Milton. 1969. ""The Optimum Quantity of Money."" Pp 1-50 in The Optimum Quantity of Money and Other Essays.Chicago: Aldine Publishing Company.
Galì, Jordi and Mark L.Gertler. 1999. ""Inflation Dynamics: a Structural Econometric Approach."" Journal of Monetary Economics 44:195-222.
http://dx.doi.org/10.1016/S0304-3932(99)00023-9
Krugman, Paul R. 1998. ""It's Baaack: Japan's Slump and the Return of the Liquidity Trap"" Brookings Papers on Economic Activity 29:137-206.
http://dx.doi.org/10.2307/2534694
Kydland, Finn E. and Edward C. Prescott. 1977. ""Rules rather than Discretion: the Inconsistency of Optimal Plans."" Journal of Political Economy 85:473-491.
http://dx.doi.org/10.1086/260580
Levin, Andrew T., David Lopez-Salido, Edward Nelson and Tack Yun. 2008. ""Macroeconometric Equivalence, Microeconomic Dissonance, and the Design of Monetary Policy."" Journal of Monetary Economics 55:548-562.
http://dx.doi.org/10.1016/j.jmoneco.2008.07.013
Pontiggia, Dario. 2012. ""Optimal Long-Run Inflation and the New Keynesian Model."" Journal of Macroeconomics 34:1077-1094.
http://dx.doi.org/10.1016/j.jmacro.2012.07.003
Summers, Lawrence H. 1991. ""How Should Long-Term Monetary Policy Be Determined? Panel Discussion."" Journal of Money, Credit and Banking 23:625-31.
http://dx.doi.org/10.2307/1992697
Svensson, Lars E.O. 2003 ""Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others."" Journal of Economic Perspectives 17:145-166.
http://dx.doi.org/10.1257/089533003772034934
Tobin, James. 1972. ""Inflation and Unemployment"" American Economic Review 62:1-18.
Walsh, Carl E. 2010. Monetary Theory and Policy. Third Edition. MIT Press Books.
Woodford, Michael. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press: Princeton.
Woodford, Michael. 1999. ""Commentary: how Should Monetary Policy Be Conducted in an Era of Price Stability?"" Pp 277-316 in New Challenges for Monetary Policy, Federal Reserve Bank of Kansas City.
http://dx.doi.org/10.1086/261167
Ball, Laurence M. 2013. ""The Case for Four Percent Inflation."" Central Bank Review 13:17-31.
Ball, Laurence M. 1994. ""Credible Disinflation with Staggered Price Setting."" American Economic Review 84:282-289.
Blanchard, Olivier, Giovanni Dell'Ariccia and Paolo Mauro. 2010. ""Rethinking Macroeconomic Policy."" Journal of Money, Credit, and Banking 42:199-215.
http://dx.doi.org/10.1111/j.1538-4616.2010.00334.x
Blanchard, Olivier and Jordi Galí. 2007. ""Real Wage Rigidities and the New Keynesian Model."" Journal of Money, Credit, and Banking 39:35-65.
http://dx.doi.org/10.1111/j.1538-4616.2007.00015.x
Calvo, Guillermo A. 1983. ""Staggered Prices in a Utility-Maximising Framework."" Journal of Monetary Economics 12:383-398.
http://dx.doi.org/10.1016/0304-3932(83)90060-0
Christiano, Lawrence M., and Martin Eichenbaum and Charles L. Evans. 2005. ""Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy."" Journal of Political Economy 113:1-45.
http://dx.doi.org/10.1086/426038
Fisher, Irving. 1933. ""The Debt-Deflation Theory of Great Depressions."" Econometrica 1:337-357.
http://dx.doi.org/10.2307/1907327
Fuhrer, Jeffrey C. 2010. ""Inflation Persistence"" Pp. 423-486 in Handbook of Monetary Economics, edited by B. Friedman and M. Woodford. Elsevier.
http://dx.doi.org/10.1016/b978-0-444-53238-1.00009-0
Fuhrer, Jeffrey C. and George Moore. 1995. ""Inflation Persistence."" Quarterly Journal of Economics 110:127-159.
http://dx.doi.org/10.2307/2118513
Friedman, Milton. 1969. ""The Optimum Quantity of Money."" Pp 1-50 in The Optimum Quantity of Money and Other Essays.Chicago: Aldine Publishing Company.
Galì, Jordi and Mark L.Gertler. 1999. ""Inflation Dynamics: a Structural Econometric Approach."" Journal of Monetary Economics 44:195-222.
http://dx.doi.org/10.1016/S0304-3932(99)00023-9
Krugman, Paul R. 1998. ""It's Baaack: Japan's Slump and the Return of the Liquidity Trap"" Brookings Papers on Economic Activity 29:137-206.
http://dx.doi.org/10.2307/2534694
Kydland, Finn E. and Edward C. Prescott. 1977. ""Rules rather than Discretion: the Inconsistency of Optimal Plans."" Journal of Political Economy 85:473-491.
http://dx.doi.org/10.1086/260580
Levin, Andrew T., David Lopez-Salido, Edward Nelson and Tack Yun. 2008. ""Macroeconometric Equivalence, Microeconomic Dissonance, and the Design of Monetary Policy."" Journal of Monetary Economics 55:548-562.
http://dx.doi.org/10.1016/j.jmoneco.2008.07.013
Pontiggia, Dario. 2012. ""Optimal Long-Run Inflation and the New Keynesian Model."" Journal of Macroeconomics 34:1077-1094.
http://dx.doi.org/10.1016/j.jmacro.2012.07.003
Summers, Lawrence H. 1991. ""How Should Long-Term Monetary Policy Be Determined? Panel Discussion."" Journal of Money, Credit and Banking 23:625-31.
http://dx.doi.org/10.2307/1992697
Svensson, Lars E.O. 2003 ""Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others."" Journal of Economic Perspectives 17:145-166.
http://dx.doi.org/10.1257/089533003772034934
Tobin, James. 1972. ""Inflation and Unemployment"" American Economic Review 62:1-18.
Walsh, Carl E. 2010. Monetary Theory and Policy. Third Edition. MIT Press Books.
Woodford, Michael. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press: Princeton.
Woodford, Michael. 1999. ""Commentary: how Should Monetary Policy Be Conducted in an Era of Price Stability?"" Pp 277-316 in New Challenges for Monetary Policy, Federal Reserve Bank of Kansas City.
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Published
2016-08-17
How to Cite
Pontiggia, D. (2016). A Note on Intrinsic Inflation Persistence and the Optimal Inflation Rate. Journal of Reviews on Global Economics, 5, 248–253. https://doi.org/10.6000/1929-7092.2016.05.21
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Special Issue: Trends in Monetary Policy and Future Directions
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