Optimal long-run inflation and the New Keynesian model
Neapolis University Pafos, Business School
Standard New Keynesian model extended with rule-of-thumb price setters à la Galí and Gertler (1999), where a fraction of firms use backward-looking pricing rules based on lagged inflation rather than forward-looking optimization
monopolistic competition with Calvo staggered price setting; fraction (1-ω) forward-looking optimizers, fraction ω rule-of-thumb backward-looking price setters
Figure 1 p.1085
Optimal long-run inflation under timeless-perspective commitment with rule-of-thumb price setters, maximum value across parameter ranges (alpha=0.3-0.85, omega=0-0.7)
Authors describe this as the maximum optimal long-run inflation target from their calibration exercise in Section 3.1