The case for inflation stability |
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Authors: | Fabrice Collard |
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Affiliation: | a CNRS-GREMAQ, IDEI, University of Toulouse, 31000 Toulouse, France b Department of Economics, University of Bern, CEPR and IMOΠ, 3012 Bern, Switzerland |
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Abstract: | 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. |
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Keywords: | E32 E52 |
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