Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/168341
Authors: 
Adam, Klaus
Weber, Henning
Year of Publication: 
2017
Series/Report no.: 
Bundesbank Discussion Paper 25/2017
Abstract: 
We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.
Subjects: 
optimal inflation rate
sticky prices
firm heterogeneity
JEL: 
E52
E31
E32
ISBN: 
978-3-95729-389-3
Document Type: 
Working Paper

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