September 2022 issue contents
Optimal Inflation Rates in a Non-linear New Keynesian Model: The Case of Japan and the United States

Tomohide Mineyama^a, Wataru Hirata^b and Kenji Nishizaki^b

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.

JEL Code: E31, E43, E52.

 
Full article (PDF, 45 pages)

Online appendix (PDF, 10 pages)

^a  International Monetary Fund
^b  Bank of Japan