This paper sets up a sticky price model where both asset holders and
non-asset holders exist to discuss its implication on optimal inflation rate. In
a canonical new Keynesian model with external habit and financial market
frictions, optimal inflation rate depends on the available tax instruments as well
as the debt/GDP ratio. If a state-contingent tax policy can be employed to
completely eliminate time-varying distortions associated with external habit,
goods market and financial market fictions, then optimal inflation rate is nil.
However, if state-contingent tax and lump-sum tax are not available, there is
a trade-off between output stabilization and price stabilization. If the
government has to maintain a constant debt/GDP ratio with time-invariant tax
policy, then optimal inflation rate is about 1 percent in the economy with
external habit, goods and financial market frictions.