Template-Type: ReDIF-Paper 1.0
Title: The Case for a Positive Euro Area Inflation Target: Evidence From France, Germany and Italy
Author-Name: Klaus Adam
Author-Email: 
Author-Name: Erwan Gautier
Author-Email: 
Author-Name: Sergio Santoro
Author-Email: 
Author-Name: Henning Weber
Author-Email:

Classification-JEL: E31, E52
Keywords: Optimal in
ation target, micro price trends, welfare

Abstract: Using micro price data underlying the Harmonized Index of Consumer
Prices in France, Germany and Italy, we estimate relative price
trends over the product life cycle and show that minimizing price and
mark-up distortions in the presence of these trends requires targeting
a significantly positive in
flation target. Relative price trends shift the
optimal infl
ation target up from a level of zero percent, as suggested
by the standard sticky price literature, to a range of 1.1%- 2.1% in
France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in
the Euro Area (three country average). Differences across countries
emerge due to systematic differences in the strength of relative price
trends. Other considerations not taken into account in the present
paper may push up the optimal infl
ation targets further. The welfare
costs associated with targeting zero infl
ation turn out to be substantial
and range between 2.1% and 4.5% of consumption in present-value
terms.

Note: 
Length: 42
Creation-Date: 2021-08
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp317
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2021_317