Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172246
Authors: 
Adam, Klaus
Weber, Henning
Year of Publication: 
2017
Series/Report no.: 
CFS Working Paper Series 579
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
Persistent Identifier of the first edition: 
Document Type: 
Working Paper
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