Abstract
We investigate the optimal inflation rate using a New Keynesian model subject to non-linearity arising from downward nominal wage rigidity (DNWR) and prolonged spells of the zero lower bound of nominal interest rates (ZLB). We rigorously evaluate the model non-linearity and calibrate the model to the Japanese and U.S. economies. We find that the optimal inflation rate is close to 2 percent for both countries, though the main driver differs by country: ZLB for Japan, but DNWR for the United States. In addition, around 1 percentage point absolute deviation from the rate of close to 2 percent induces only a minor change in social welfare.
Authors
- Tomohide Mineyama
- Wataru Hirata
- Kenji Nishizaki
JEL codes
- E31
- E43
- E52