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Title:The optimal inflation rate and firm-level productivity growth PDF Logo
Authors:Weber, Henning
Issue Date:2012
Series/Report no.:Kiel Working Papers 1773
Abstract:Empirical data show that firms tend to improve their ranking in the productivity distribution over time. A stickyprice model with firm-level productivity growth fits this data and predicts that the optimal long-run inflation rate is positive and between 1.5% and 2% per year. In contrast, the standard sticky-price model cannot fit this data and predicts optimal long-run inflation near zero. Despite positive long-run inflation, the Taylor principle ensures determinacy in the model with firm-level productivity growth, and optimal inflation stabilization policies are standard. In a two-sector extension of this model, the optimal long-run inflation rate weights the sector with the stickier prices more heavily.
Subjects:optimal monetary policy
indeterminacy
heterogenous firms
firm entry and exit
JEL:E31
E32
E52
E61
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

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