The Case for inflation stability Dellas, Harris; Collard, Fabrice

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Authors
Dellas, Harris ; Collard, Fabrice
Appears In
Journal of Monetary Economics
Subjects
Monetary policy -- Interpretation and construction; Economic stabilization -- Analysis; Inflation stabilization; Investment; Price rigidity; Distortions
Audience
Academic; Trade
Summary
We evaluate the case for inflation stabilization in a New Keynesian (NNS) model that includes various frictions, capital accumulation and a variety of shocks. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains. Policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible. Fabrice Collard and Harris Dellas
Bookmark
https://trove.nla.gov.au/work/783192
Work ID
783192

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