The optimal inflation rate under Schumpeterian growth

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

To analyze the relationship between inflation and economic growth, we construct an endogenous growth model with creative destruction, incorporating sticky prices due to menu costs. Price changes reduce the reward for innovation and thus lower the frequency of creative destruction. Central banks can maximize the growth rate by setting their inflation target at the negative of a fundamental growth rate. While the optimal inflation rate may be greater than the growth-maximizing inflation rate, our calibrated model shows that the optimal inflation rate is close to the growth-maximizing inflation rate and that a deviation from the optimal level has sizable impacts.

Original languageEnglish
JournalJournal of Monetary Economics
DOIs
Publication statusAccepted/In press - 2018 Jan 1

Keywords

  • Creative destruction
  • Menu cost
  • Monetary policy
  • New Keynesian

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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