Should the ECB adjust its strategy in the face of a lower r*?
Federal Reserve Bank of Boston; CREI, UPF and BSE; Banque de France; Banque de France
Medium-scale New Keynesian DSGE model with trend inflation, imperfect price and wage indexation to past inflation and productivity growth, Calvo staggered price and wage setting, habit formation in consumption, and an effective lower bound cons
intermediate firms: monopolistic competition with Calvo pricing; final firms: perfect competition with Dixit-Stiglitz aggregation
Section 6.3, Figure 7
Optimal inflation with high interest rate smoothing (rho_i=0.95), r*=2.8%