Template-Type: ReDIF-Paper 1.0
Title: Optimal Trend Inflation
Author-Name: Klaus Adam
Author-Email: 
Author-Name: Henning Weber
Author-Email: 
Classification-JEL: E52, E31, E32
Keywords: optimal inflation rate, sticky prices, firm heterogeneity

Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate
than their popular homogenous-firm counterparts: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to
productivity disturbances. We show this by aggregating a heterogenous-firm model
with sticky prices in closed form. Using firm-level data from the U.S. Census Bureau, we estimate the historically optimal inflation path for the U.S. economy. In
the year 1977, the optimal inflation rate stood at 1.5%, but subsequently declined
to around 1.0% in the year 2015. Inflation rates up to twice these numbers can be
rationalized if one considers product demand elasticities more in line with the trade
literature or if one considers firms that (partially) index prices to lagged inflation
rates

Note: 
Length: 65
Creation-Date: 2018-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp010
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_010