The Optimal Inflation Target and the Natural Rate of Interest

Abstract

We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.

On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

“…In the present section we study whether modifying the specification of monetary policy in our baseline model can help reconcile theory and evidence. In particular, and following Christiano et al (2015), Gust et al (2017) and Andrade et al (2018), among others, we replace the baseline interest rate rule (1) with the following shadow rate rule:…”

Optimal Inflation and Inflation Targeting: International Experience

“…Keywords: monetary policy; optimal inflation; threshold inflation; inflation targeting; countries comparative analysis и более высокого для стран с формирующимся рынком), а в оценках порогового уровня наблюдалась тенденция к снижению. Например, для развитых стран до кризиса 2008 г. был выявлен порог в размере 3,5-4% [15], а оценка после кризиса составила 2% и ниже [4]. Аналогично оценка для стран с формирующимся рынком снизилась с 12 [5] до 4-6% [6].…”

“…Понятие целевого уровня инфляции обычно используется в практике центральных банков, проводящих денежно-кредитную политику в рамках режима инфляционного таргетирования (ИТ). Понятие оптимального уровня инфляции используется при теоретическом моделировании этого феномена [1][2][3][4]. Вместе с тем эмпирические исследования чаще ориентированы на выявление порогового (threshold) уровня инфляции -некоторой точки перегиба, в которой нелинейная связь показателей инфляции и выпуска меняет знак на противоположный [5].…”

Optimal inflation target: insights from an agent-based model

“…The issue of an optimal inflation target has only recently been considered within the mainstream DSGE macroeconomic model [33,34] (see also [27] for a direct comparison of ABMs and DSGE models on a related topic). In this framework, the main cost of inflation comes from price dispersion and is a consequence of the following string of assumptions [33]: a) firms face friction costs and cannot update their prices as often as they would like; b) inflation leads to a stronger dispersion of (stale) prices across different sectors of the economy; c) stronger price deviations [7,36].…”