Optimal Inflation for China's Economy

A well-defined long-term inflation target is important in stabilizing market inflation expectations.It boosts efficiency of monetary policy and improves the social welfare.We consider a DSGE model and conduct a stochastic simulation to determine the endogenous variables and investigate the optimal inflation rate under various monetary policy rules.We find that in the short run although higher inflation rates may be optimal,in the long run lower inflation rates can minimize social losses.Maintaining price stability seems to be the dominant task in China's monetary policy.