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Innovation and the Optimal Rate of Inflation

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  • Weber, Henning
Abstract
Empirical data suggest that new rms tend to grow faster than incumbent firms in terms of their productivity. A sticky-price model with learning-by-doing in new firms fits this data and predicts that for plausible calibrations, the optimal long-run inflation rate is positive and between 0.5% and 1.5% per year. A positive long-run inflation rate helps the fast-growing new firms to align their real price with their idiosyncratic productivity growth. In contrast, the standard sticky-price model without learning-by-doing in new firms predicts an optimal long-run inflation rate near zero. In a two-sector model with learning-by-doing in new firms, the policy tradeoff that arises between new and incumbent firms is considerably more severe than the policy tradeoff that arises between economic sectors.

Suggested Citation

  • Weber, Henning, 2015. "Innovation and the Optimal Rate of Inflation," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113087, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113087
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    References listed on IDEAS

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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