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Title:Hyperbolic discounting and positive optimal inflation PDF Logo
Authors:Graham, Liam
Snower, Dennis J.
Issue Date:2011
Series/Report no.:CEPR Discussion Paper Series, Centre for Economic Policy Research (CEPR), London 8390
Abstract: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.
Subjects:inflation targeting
monetary policy
nominal inertia
optimal monetary policy
Phillips curve and unemployment
JEL:E20
E40
E50
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW

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