M P RA Inflation persistence and optimal positive long-run inflation In ‡ation Persistence and Optimal Positive Long-run In ‡ation

Munich Personal, Repec Archive, Dario Pontiggia, Dario Pontiggia
2007 unpublished
Within New Keynesian economics, the optimality of a monetary policy that aims at zero in ‡ation is surprisingly robust. Full price stability is optimal despite the ine¢ ciency of the nonstochastic steady state and the existence of a positively sloped long-run Phillips-curve trade-o¤. Even under in ‡ation persistence due to backward-looking price indexation by price setters, zero in ‡ation remains optimal. We show how backward-looking rule-of-thumb behaviour by price setters results in optimal
more » ... esults in optimal positive long-run in ‡ation. Comparing theoretical explanations for structural in ‡ation persistence, the features that seem capable of delivering an endogenously optimal positive in ‡ation target are costly disin ‡ation, long-run Phillips-curve trade-o¤, and steady-state distortions. JEL classi...cation: E31, E52.