Optimal Inflation for the U.S. Economy

By Roberto M. Billi
First version: April 2007
This version: June 2008
RWP 07-03
Research Division
Federal Reserve Bank of Kansas City

Abstract    

This paper characterizes the optimal inflation rate in a standard macro model, which accounts for an occasionally-binding zero lower bound on nominal interest rates and model uncertainty. Estimates of the optimal rate of inflation, as measured by the PCE price index, range 0.7 to 1.4 percent per year. Even under extreme model uncertainty, the optimal inflation rate is not as high as previous studies suggest.

Keywords: commitment, liquidity trap, long-run tradeoffs, monetary policy, nonlinear, robust control, stationary distribution, worst-case scenarios


JEL classification: C63, E31, E52

Back to top       RWP home