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 language | English |
|---|---|
| Journal | Journal of Monetary Economics |
| DOIs | |
| Publication status | Accepted/In press - 2018 Jan 1 |
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Keywords
- Creative destruction
- Menu cost
- Monetary policy
- New Keynesian
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
Cite this
The optimal inflation rate under Schumpeterian growth. / Oikawa, Koki; Ueda, Kozo.
In: Journal of Monetary Economics, 01.01.2018.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - The optimal inflation rate under Schumpeterian growth
AU - Oikawa, Koki
AU - Ueda, Kozo
PY - 2018/1/1
Y1 - 2018/1/1
N2 - 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.
AB - 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.
KW - Creative destruction
KW - Menu cost
KW - Monetary policy
KW - New Keynesian
UR - http://www.scopus.com/inward/record.url?scp=85050777602&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85050777602&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2018.07.012
DO - 10.1016/j.jmoneco.2018.07.012
M3 - Article
AN - SCOPUS:85050777602
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
SN - 0304-3932
ER -