"We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and show that steady-state inflation affects welfare...

Calvo contracts, which are the basis of the current generation of New Keynesian models, widely include indexation to general ináation. We argue that the indexing formula should be expected ináation rather than lagged ináation. This is likely to optimise the welfare of the representative agent...