Kiel Working Papers, Kiel Institute for World Economics
No 1685:
Optimal inflation and firms' productivity dynamics
Henning Weber
Abstract: Empirical data indicate that firms tend to have
below-average productivity upon entry and that they tend to experience
post-entry productivity growth. I present a New Keynesian model with growth
in firm-specific productivity and firm turnover that captures these two
phenomena. The model predicts that the optimal rate of long-run inflation
is positive and equal to growth in firm-specific productivity. When
linearized at positive optimal inflation, the model is observationally
equivalent to the basic New Keynesian model with homogenous productivity
linearized at zero inflation. Optimal stabilization policies are the same
in both models, and the Taylor principle ensures determinacy in either
model
Keywords: Optimal long-run inflation, trend inflation, heterogenous firms; (follow links to similar papers)
JEL-Codes: E01,; E31,; E32; (follow links to similar papers)
48 pages, February 2011
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