Optimal inflation target may need to exceed two percent for welfare gains.
The study shows that traditional economic models may underestimate the optimal inflation target. By considering factors like labor market frictions and wage rigidity, the researchers found that the ideal inflation rate could be higher than previously thought, around two percent or more. Deviating from this target could lead to much higher welfare costs than previously believed. The researchers suggest that adjusting monetary policy based on the unemployment rate could improve outcomes and bring significant benefits.