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Published online by Cambridge University Press:  09 February 2012

Liam Graham*
University College London
Dennis J. Snower
Kiel Institute for the World Economy, Christian-Albrechts University, CEPR and IZA
Address correspondence to: Liam Graham, Department of Economics, University College London, Gower Street, London WC1E 6BT, UK; e-mail:


The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan, King, and Wolman [Review of Economic Studies 10 (4), 825–860] uses a richer model but still finds deflation optimal. In an otherwise standard New Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.

Copyright © Cambridge University Press 2012

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