Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/46553 
Year of Publication: 
2011
Series/Report no.: 
CESifo Working Paper No. 3464
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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: 
optimal monetary policy
inflation targeting
unemployment
Phillips curve
nominal inertia
monetary policy
JEL: 
E20
E40
E50
Document Type: 
Working Paper

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