Hyperbolic discounting and positive optimal inflation

Arbeitspapier

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) 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.

Show object

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 5694

Classification and Topics

• Classification: Wirtschaft ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; Money and Interest Rates: General ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General
• Subject: optimal monetary policy ; inflation targeting ; unemployment ; Phillips curve ; nominal inertia ; monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Graham, Liam ; Snower, Dennis J.
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/51660
• URN: urn:nbn:de:101:1-201105173304