Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/58275
Authors: 
Weber, Henning
Year of Publication: 
2012
Series/Report no.: 
Kiel Working Paper 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

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