Inflation Rates Above 5.5% Render Central Bank Policies Ineffective
The study looked at how different levels of inflation affect optimal pricing in a model with sticky prices. They found that the best price setting is only clear when inflation is below 5.5% per year, which is lower than recent average inflation rates. Surprisingly, in this model, as inflation increases, the relationship between prices and inflation becomes less steep, going against the idea that low inflation leads to flatter price-inflation curves. By using a different type of price stickiness, the model can avoid these unexpected results.