NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Optimal Rate of Inflation

Stephanie Schmitt-Grohe, Martin Uribe

NBER Working Paper No. 16054
Issued in June 2010
NBER Program(s):   EFG   ME

Observed inflation targets around the industrial world are concentrated at two percent per year. This chapter investigates the extent to which the observed magnitudes of inflation targets are consistent with the optimal rate of inflation predicted by leading theories of monetary nonneutrality. We find that consistently those theories imply that the optimal rate of inflation ranges from minus the real rate of interest to numbers insignificantly above zero. Furthermore, we argue that the zero bound on nominal interest rates does not represent an impediment for setting inflation targets near or below zero.

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Document Object Identifier (DOI): 10.3386/w16054

Published: “The Optimal Rate of Inflation,” (with Mart ́ın Uribe), in Handbook of Monetary Economics edited by Benjamin M. Friedman and Michael Woodford, Volume 3B, Elsevier, San Diego CA, 2011, 653-722.

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