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Labor-Market Frictions and Optimal Inflation

Author Info

  • Carlsson, Mikael

    ()

    (Research Department, Central Bank of Sweden)

  • Westermark, Andreas

    ()

    (Research Department, Central Bank of Sweden)

Abstract

In central theories of monetary non-neutrality the Ramsey optimal 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 1.11 percent per year.

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File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2012/rap_wp259_120309.pdf
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 259.

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Length: 35 pages
Date of creation: 01 Mar 2012
Date of revision:
Handle: RePEc:hhs:rbnkwp:0259
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Phone: 08 - 787 00 00
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Keywords: Optimal Monetary Policy; Inflation; Labor-market Distortions;

Find related papers by JEL classification:

  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
  • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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  1. Galuscak, Kamil & Keeney, Mary & Nicolitsas, Daphne & Smets, Frank & Strzelecki, Pawel & Vodopivec, Matija, 2012. "The determination of wages of newly hired employees: Survey evidence on internal versus external factors," Labour Economics, Elsevier, vol. 19(5), pages 802-812.
  2. Carlos Thomas, 2006. "Search and matching frictions and optimal monetary policy," LSE Research Online Documents on Economics 19782, London School of Economics and Political Science, LSE Library.
  3. KIM, Jinill & RUGE-MURCIA, Francisco J., 2009. "Monetary Policy When Wages Are Downwardly Rigid : Friedman Meets Tobin," Cahiers de recherche 15-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
  5. Ester Faia & Lorenza Rossi, 2013. "Union Power, Collective Bargaining, And Optimal Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 408-427, 01.
  6. Adam, Klaus & Billi, Roberto M., 2004. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," CFS Working Paper Series 2004/13, Center for Financial Studies (CFS).
  7. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," Kiel Working Papers 1513, Kiel Institute for the World Economy (IfW).
  8. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.
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Cited by:

  1. Anders Vredin, 2015. "Inflation targeting and financial stability: providing policymakers with relevant information," BIS Working Papers 503, Bank for International Settlements.

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