HYPERBOLIC DISCOUNTING AND POSITIVE OPTIMAL INFLATION

By Liam Graham, Dennis J. Snower. Macroeconomic Dynamics, 2011

196 citations recorded by the source corpus.

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan, King, and Wolman [Review of Economic Studies 10 (4), 825–860] uses a richer model but still finds deflation optimal. In an otherwise standard New Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/501bf638a9fada6344f8a876628f73a0690c5ee7

Citations in the corpus

• The Macroeconomics of Trend Inflation (2014, unknown): “59 Kobayashi and Muto (2013), Ascari and Florio (2012), and Kurozumi (2013b) extend the analysis of Ascari and Ropele (2009) by introducing adaptive learning à la Evans and Honkapohja (2001) in the baseline GNK model with trend inflation.”
• The Gender Wage Gap: Extent, Trends, and Explanations (2017, unknown): “Employment probabilities in the post-leave period were increased; and the effect on wages was not statistically significant (see, Baum and Ruhm 2013).”