In his recent Economist debate with Brad DeLong on whether the inflation target should be raised, eminent monetary economist Bennett McCallum emphasizes the Friedman rule as an important determinant of the optimal long-term rate of inflation:
First, in the absence of the ZLB, the optimal steady-state inflation rate—according to standard new Keynesian reasoning—lies somewhere between the Friedman-rule value of deflation at the steady-state real rate of interest (therefore something like –2% to 4%) and the Calvo-model value of zero, with careful calibration indicating that the weight on the latter may be considerably larger. Second, a theoretically attractive modification of the Calvo model would imply that the weight on the second of these values should be zero, so that the Friedman-rule prescription itself would be optimal (in the absence of the ZLB).
Third, even when the effects of the ZLB are added to the analysis, the optimal inflation rate is (according…
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