We estimate for Germany, France and Italy the inflation rate that minimizes distortions related to price adjustment rigidities and product turnover. We start with evidence of significant negative relative price trends over the product life cycle and the observation that, when nominal prices are adjusted only infrequently, this decline in relative prices can only come about when there is a positive average rate of inflation.
Minimizing distortions related to sticky prices requires a significantly positive inflation target. For the euro area, this ranges between 1.1 and 1.7 per cent (three-countries average). Other considerations not taken into account in the present paper may call for a positive inflation rate and, at least partially in addition to those considered here, push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation, as suggested by traditional sticky price models, turn out to be substantial.
