Economics Research Seminar

This paper proposes an overlapping-generations model with sticky wages and prices to examine which inflation rate is socially optimal. While flexible wages would result in positive optimal levels of inflation, we show that sticky wages, in combination with empirically plausible changes in productivity over workers’ lives, make moderate deflation optimal. We also study intergenerational conflicts and show that young voters support a transition to lower inflation while older ones tend to support higher inflation rates.