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An Essay on Optimal Inflation

Farestveit, Robert Eric LU (2012) NEKP01 20121
Department of Economics
Abstract
The main goal of this thesis is to quantify optimal inflation rates for fourteen regions in Europe and North America, as well as to address recent proposals for higher inflation targets. This is done using a partially linear regression of the functional form of inflation and relative price variability, and using the definition of optimal inflation as the inflation rate that minimizes RPV. Our results confirm a non-linear shape of the functional form, with ten of the economies displaying a U-shape. For the majority of the European economies, the optimal inflation rate is found to be within the tolerance interval of the inflation target. This implies that the optimal rate depends on the anchoring of expectations with relative price... (More)
The main goal of this thesis is to quantify optimal inflation rates for fourteen regions in Europe and North America, as well as to address recent proposals for higher inflation targets. This is done using a partially linear regression of the functional form of inflation and relative price variability, and using the definition of optimal inflation as the inflation rate that minimizes RPV. Our results confirm a non-linear shape of the functional form, with ten of the economies displaying a U-shape. For the majority of the European economies, the optimal inflation rate is found to be within the tolerance interval of the inflation target. This implies that the optimal rate depends on the anchoring of expectations with relative price variability increasing with unanticipated inflation. These results should explain why the inflation-RPV relationship is not stable over time and deteriorates in periods of high-unexpected inflation. (Less)
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author
Farestveit, Robert Eric LU
supervisor
organization
course
NEKP01 20121
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Optimal inflation, Inflation expectations, Inflation target, Relative price variability, Zero lower bound
language
English
id
3052514
date added to LUP
2012-09-27 11:42:05
date last changed
2012-09-27 11:42:05
@misc{3052514,
  abstract     = {The main goal of this thesis is to quantify optimal inflation rates for fourteen regions in Europe and North America, as well as to address recent proposals for higher inflation targets. This is done using a partially linear regression of the functional form of inflation and relative price variability, and using the definition of optimal inflation as the inflation rate that minimizes RPV. Our results confirm a non-linear shape of the functional form, with ten of the economies displaying a U-shape. For the majority of the European economies, the optimal inflation rate is found to be within the tolerance interval of the inflation target. This implies that the optimal rate depends on the anchoring of expectations with relative price variability increasing with unanticipated inflation. These results should explain why the inflation-RPV relationship is not stable over time and deteriorates in periods of high-unexpected inflation.},
  author       = {Farestveit, Robert Eric},
  keyword      = {Optimal inflation,Inflation expectations,Inflation target,Relative price variability,Zero lower bound},
  language     = {eng},
  note         = {Student Paper},
  title        = {An Essay on Optimal Inflation},
  year         = {2012},
}