ASYMMETRIC PRICE RIGIDITY AND OPTIMAL INFLATION
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ASYMMETRIC PRICE RIGIDITY AND OPTIMAL INFLATION
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S042473880000616-6-1
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Article
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Published
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17-37
Abstract
The author studies the long'run optimal rate of inflation. We argue that various frictions in the functioning of markets may well lead to the optimality of a positive long'run inflation. The paper studies optimal long'run inflation in the environment with asymmetric price rigidity, when prices are more rigid downwards than upwards. We prove two main theoretical results. First, asymmetric price rigidity does not affect the expected equilibrium level of output in an environment with forward looking price setting by firms. Second, in the conditions of asymmetric price rigidity, it is optimal to choose a positive rate of inflation. Numerical calibration of the model suggested that the optimal rate of inflation falls within 2%.
Date of publication
01.07.2008
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