Publication
May 2012
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.
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English (PDF, 48 pages, 458 KB) |
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Author | Henning Weber |
Series | Kiel Institute Working Papers |
Issue | 1773 |
Publisher | Kiel Institute for the World Economy |
Copyright | © 2012 Kiel Institute for the World Economy |