Journal Article

Relative Price Changes and the Optimal Inflation Rate

Abstract: Relative prices of some goods or sectors have long-run trends: For example, the price of services relative to goods has been rising fairly steadily for decades. Other relative prices do not have long-run trends but sometimes fluctuate dramatically from one period to the next. How should monetary policy behave in the face of these trends and fluctuations? I use a model with costly price adjustment to study the optimal rate of inflation when there are trends in relative prices and to construct hypothetical U.S. inflation rates that would have minimized the costs of price adjustment implied by the model.

https://doi.org/10.21144/eq1010303

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Economic Quarterly

Publication Date: 2015

Issue: 3Q

Pages: 245-274