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Labor market frictions and optimal steady-state inflation

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  • Carlsson, Mikael
  • Westermark, Andreas

Abstract

In central theories of monetary non-neutrality, the Ramsey optimal steady-state inflation rate varies between the negative of the real interest rate and zero. This paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription. We show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive. Specifically, for a standard U.S. calibration, we find a Ramsey optimal inflation rate of 1.16 percent per year.

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  • Carlsson, Mikael & Westermark, Andreas, 2016. "Labor market frictions and optimal steady-state inflation," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 67-79.
    • Handle: RePEc:eee:moneco:v:78:y:2016:i:c:p:67-79
    DOI: 10.1016/j.jmoneco.2016.01.002
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    12. Adam, Klaus & Weber, Henning, 2019. "Price trends over the product life cycle and the optimal inflation target," Discussion Papers 32/2019, Deutsche Bundesbank.
    13. Tomohide Mineyama & Wataru Hirata & Kenji Nishizaki, 2019. "Inflation and Social Welfare in a New Keynesian Model: The Case of Japan and the U.S," Bank of Japan Working Paper Series 19-E-10, Bank of Japan.
    14. Miura, Shogo, 2023. "Optimal inflation rate and fair wage," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 158-167.
    15. Adam, Klaus & Weber, Henning, 2017. "Optimal Trend Inflation," CEPR Discussion Papers 12160, C.E.P.R. Discussion Papers.
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