Template-type: ReDIF-Article 1.0
Author-Name: Mª Ángeles Caraballo
Author-X-Name-First: Mª Ángeles
Author-X-Name-Last: Caraballo
Author-Homepage: 
Author-Workplace-Name: Universidad de Sevilla
Author-Workplace-Homepage: http://www.ehe.us.es/
Author-Name: Carlos Dabús
Author-X-Name-First: Carlos
Author-X-Name-Last: Dabús
Author-Workplace-Name: CONICET and Universidad Nacional del Sur
Author-Workplace-Homepage: http://www.economia.uns.edu.ar/
Title: Price dispersion and optimal inflation: The Spanish case
Abstract: This paper studies the relation between inflation and relative price variability (RPV) in
	Spain during the 1987-2009 period. We find that this relation presents a U-shape profile,
	and that the optimal annual inflation rate (defined as the one that minimizes RPV) is around
	4%, higher than the 2% inflation target proposed by the European Monetary Union. More
	importantly, this result does not depend on whether the monetary regime is before or
	after the euro. Hence, the main policy implication is that disinflation efforts to achieve
	the 2% inflation target result in welfare losses. The key link between inflation and RPV
	is unexpected inflation, whose optimal level is around zero. This suggests that monetary
	policy matters: the welfare costs associated with higher RPV can be minimized with a
	credible and predictable inflation targeting policy set at the appropriate level.


	An online appendix is available.
Classification-JEL: E30, E31
Keywords: inflation expectations, inflation uncertainty, monetary policy, optimal inflation,
relative price variability, semiparametric estimation.
Journal: Journal of Applied Economics
Pages: 49-70
Number: 1
Volume: 16
Year: 2013
Month: May
File-URL: http://www.sciencedirect.com/science/journal/15140326/16/1
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File-URL: http://www.sciencedirect.com/science/journal/15140326/16/1
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Handle: RePEc:cem:jaecon:v:16:y:2013:n:1:p:49-70