Itskhoki,
Oleg. Asymmetric
Price Rigidity and the Optimal Rate of Inflation. # BSP/2004/075 E. - 28 p. (Eng)
Abstract This paper addresses the issue of optimal rate of
inflation. Stable inflation at some optimal level is the long-term goal of monetary
policy as opposed to short-term stabilization policy. In the paper it is argued
that the optimal rate of inflation is positive due to a number of reasons. The
paper studies the relationship between long-run level of inflation and price stickiness.
In particular the case of asymmetric price rigidity - a situation when prices
are more rigid downwards than upwards - is analyzed. The idea of asymmetric price
rigidity is not new for (New) Keynesian theories. However, formal analysis of
asymmetric rigidity is far from being exhaustive. It turns out that asymmetric
price rigidity may enhance the optimality of a positive inflation. The paper
studies a formal model of asymmetric rigidity and its implication. Some possible
sources of asymmetry are identified. An attempt is made to find empirical support
for the hypothesis of asymmetric rigidity.
