Kiel Working Papers, Kiel Institute for World Economics
No 1773:
The Optimal Inflation Rate and Firm-Level Productivity Growth
Henning Weber
Abstract: Empirical data show that firms tend to improve their
ranking in the productivity distribution over time. A sticky-price 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
Keywords: Optimal monetary policy, indeterminacy, heterogenous firms, firm entry and exit; (follow links to similar papers)
JEL-Codes: E31,; E32,; E52,; E61; (follow links to similar papers)
46 pages, May 2012
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