Optimal Inflation for the U.S. Economy1

Abstract: This paper characterizes the optimal inflation rate in a standard macro model, which accounts for an occasionally-binding zero lower bound on nominal interest rates and model uncertainty. Estimates of the optimal rate of inflation, as measured by the PCE price index, range 0.7 to 1.4 percent per year. Even under extreme model uncertainty, the optimal inflation rate is not as high as previous studies suggest