Labor-Market Frictions and Optimal Inflation
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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| Length: | 35 pages |
| Date of creation: | 01 Mar 2012 |
| Date of revision: | |
| Handle: | RePEc:hhs:rbnkwp:0259 |
| Contact details of provider: | Postal: Phone: 08 - 787 00 00 Fax: 08-21 05 31 Web page: http://www.riksbank.com/Email: More information through EDIRC
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