TY - JOUR
T1 - The optimal inflation rate under Schumpeterian growth
AU - Oikawa, Koki
AU - Ueda, Kozo
N1 - Funding Information:
We thank Ricardo Reis (Editor), two anonymous referees, Ippei Fujiwara, Tatsuro Iwaisako, Minoru Kitahara, and participants in seminars and conferences at CEF, Hitotsubashi, Keio, Kyoto, Osaka, Tokyo, and Waseda universities. All remaining errors are our own. This work was supported by JSPS Grant-in-Aid for Scientific Research (C), 17K03635 .
Publisher Copyright:
© 2018 The Authors
PY - 2018/12
Y1 - 2018/12
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
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U2 - 10.1016/j.jmoneco.2018.07.012
DO - 10.1016/j.jmoneco.2018.07.012
M3 - Article
AN - SCOPUS:85050777602
VL - 100
SP - 114
EP - 125
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
SN - 0304-3932
ER -