Optimal inflation for Japan's economy

This paper quantitatively evaluates a steady-state inflation rate that is considered optimal from the perspective of social welfare, using a model describing the Japanese economy. Specifically, we build a DSGE model capable of evaluating the effects, on social welfare, of points concerning the costs and benefits that accompany inflation: the opportunity cost of holding money, the zero lower bound on nominal interest rates, price stickiness and the downward wage rigidity. Building on this, we conduct stochastic simulations that calculate the social loss with different steady-state inflation rates, and investigate the optimal inflation rate. We also analyze the range of the optimal inflation rate when we change the model settings. J. Japanese Int. Economies 22 (4) (2008) 439-475. Bank of Japan,japan. (C) 2008 Elsevier Inc. All rights reserved.