In the workhorse DSGE model, the optimal steady state inflation rate is near to zero or slightly negative and inflation is almost completely stabilized along the business cycle (Schmitt-Grohè and Uribe, 2011). We reconsider the issue, allowing for agent heterogeneity in the access to the market...

We challenge the widely held belief that New-Keynesian models cannot predict optimal positive inflation rates. In fact these are justi…fied by the Phelps argument that monetary fi…nancing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with...

We challenge the widely held belief that New-Keynesian models cannot predict optimal positive in‡ ations. We finnd that these are justified by the Phelps argument. This mainly happens because we also consider distortionary expects of public transfers. Our predictions are broadly consistent...