On the Optimal Inflation Rate

Markus K. Brunnermeier; Yuliy Sannikov

doi:10.3386/w22133

On the Optimal Inflation Rate

Markus K. Brunnermeier & Yuliy Sannikov

Working Paper 22133

DOI 10.3386/w22133

Issue Date March 2016

In our incomplete markets economy financial frictions affect the optimal inflation target. Households choose portfolios consisting of risky (uninsurable) capital and money. Money is a bubbly store of value. The market outcome is constrained Pareto inefficient due to a pecuniary externality. Each individual agent takes the real interest rate as given, while in the aggregate it is driven by the economic growth rate, which in turn depends on individual portfolio decisions. Higher inflation due to higher money growth lowers the real interest rate (on money) and tilts the portfolio choice towards physical capital investment. The optimal inflation target boosts growth and welfare and is higher for emerging market economies.

We thank Itamar Drechsler for helpful comments and Yann Koby, Christian Wolf and especially Sebastian Merkel for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Markus K. Brunnermeier
Disclosures 2015-

As a guiding principle I follow the NBER Research Disclosure Policy: http://www.nber.org/researchdisclosurepolicy.html

To date, no single relationship (other than my salary form Princeton University) has accounted for more than 10 percent of my aggregate annual income in that year.

Significant Remunerated Activities:

Speaking engagements and lectures

Central banks

ECB, ESRB, Bundesbank (Research Council), Bank of Korea (Keynote presentation), Bank of England, National Bank of Austria, Swiss National Bank, Bank of Japan, Federal Reserve, New York Fed, Bank of Canada, Bank of Chile, Bank of Korea

International financial institution

IMF

Academic Organizations

Swiss Finance Institute, 2012-

No expert testimony for law suits or paid consulting work for private cooperation to date.

Research Grants:

Sloan Foundation 2011-12

Guggenheim Fellowship, 2010-11

INQUIRE Europe, Research Grant

Visiting Scholar and Other:

Milton Friedman Institute, visiting scholar 2011

American Economic Review, Journal of Finance, Associated Editorship

Significant Non-Compensated Activities:

American Finance Association: Director

Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present

INET Advisory Board Member, 2009 – present
MARC RIS BibTeΧ

On the Optimal Inflation Rate

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