Relative Price Changes and the Optimal Inflation Rate

30 Pages Posted: 4 Nov 2016

Date Written: 2015

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.

Suggested Citation

Wolman, Alexander L., Relative Price Changes and the Optimal Inflation Rate (2015). Economic Quarterly, Issue 3Q, pp. 245-274, 2015. Available at SSRN: https://ssrn.com/abstract=2864234 or http://dx.doi.org/10.21144/eq1010303

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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