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Hyperbolic Discounting and Positive Optimal Inflation

  • The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan, King, and Wolman [Review of Economic Studies 10 (4), 825–860] uses a richer model but still finds deflation optimal. In an otherwise standard New Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

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Metadaten
Document Type:Article
Language:English
Author(s):Dennis Snower, Liam Graham
Parent Title (English):Macroeconomic Dynamics
Publication year:2013
Publishing Institution:Hertie School
First Page:591
Last Page:620
DOI:https://doi.org/10.1017/S1365100511000393
Release Date:2019/09/11
Tag:Optimal Monetary Policy, Inflation Targeting, Phillips Curve, Nominal Inertia, Monetary Policy
Volume:17
Issue:3
Licence of document (German):Metadaten / metadata
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