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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Cited by:

    1. Antoine Lepetit, 2017. "The Optimal Inflation Rate with Discount Factor Heterogeneity," Working Papers hal-01527816, HAL.
    2. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The optimal inflation target and the natural rate of interest," Economics Working Papers 1591, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Adam, Klaus & Weber, Henning, 2017. "Optimal trend inflation," CFS Working Paper Series 579, Center for Financial Studies (CFS).
    4. Klaus Adam & Henning Weber, 2018. "Optimal Trend Inflation," CRC TR 224 Discussion Paper Series crctr224_010_2018, University of Bonn and University of Mannheim, Germany.
    5. Klaus Adam & Henning Weber, 2018. "Optimal Trend Inflation," CESifo Working Paper Series 7028, CESifo Group Munich.

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