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Labor-Market Frictions and Optimal Inflation

  • Carlsson, Mikael

    ()

    (Research Department, Central Bank of Sweden)

  • Westermark, Andreas

    ()

    (Research Department, Central Bank of Sweden)

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
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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  1. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
  2. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.
  3. Ester Faia & Lorenza Rossi, 2010. "Unions Power, Collective Bargaining and Optimal Monetary Policy," Quaderni di Dipartimento 126, University of Pavia, Department of Economics and Quantitative Methods.
  4. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 0707, European Central Bank.
  5. 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.
  6. 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.
  7. Klaus Adam & Roberto M. Billi, 2005. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Research Working Paper RWP 05-07, Federal Reserve Bank of Kansas City.
  8. Kamil Galuščắk & Mary Keeney & Daphne Nicolitsas & Frank Smets & Pawel Strzelecki & Matija Vodopivec, 2011. "The determination of wages of newly hired employees: survey evidence on internal versus external factors," Working Papers 129, Bank of Greece.
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