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Labor-Market Frictions and Optimal Inflation

Author

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  • 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.

Suggested Citation

  • Carlsson, Mikael & Westermark, Andreas, 2012. "Labor-Market Frictions and Optimal Inflation," Working Paper Series 259, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0259
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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2012/rap_wp259_120309.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Antoine Lepetit, 2022. "The Optimal Inflation Rate with Discount Factor Heterogeneity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 1971-1996, October.
    3. Philippe Andrade & Jordi Gali & Herve Le Bihan & Julien Matheron, 2019. "The Optimal Inflation Target and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(2 (Fall)), pages 173-255.
    4. Garcia-Hiernaux, Alfredo & Gonzalez-Perez, Maria T. & Guerrero, David E., 2023. "Eurozone prices: A tale of convergence and divergence," Economic Modelling, Elsevier, vol. 126(C).
    5. Cacciatore, Matteo & Ghironi, Fabio, 2021. "Trade, unemployment, and monetary policy," Journal of International Economics, Elsevier, vol. 132(C).
    6. Klaus Adam & Henning Weber, 2019. "Optimal Trend Inflation," American Economic Review, American Economic Association, vol. 109(2), pages 702-737, February.
    7. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
    8. Nurlan Turdaliev, 2019. "Heterogeneity and monetary policy," Journal of Economics, Springer, vol. 128(2), pages 119-145, October.
    9. Consolo, Agostino & Koester, Gerrit & Nickel, Christiane & Porqueddu, Mario & Smets, Frank, 2021. "The need for an inflation buffer in the ECB’s price stability objective – the role of nominal rigidities and inflation differentials," Occasional Paper Series 279, European Central Bank.
    10. Adam, Klaus & Weber, Henning, 2019. "Price trends over the product life cycle and the optimal inflation target," Discussion Papers 32/2019, Deutsche Bundesbank.
    11. Anders Vredin, 2015. "Inflation targeting and financial stability: providing policymakers with relevant information," BIS Working Papers 503, Bank for International Settlements.
    12. 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.
    13. Kurozumi, Takushi & Van Zandweghe, Willem, 2024. "Output-inflation trade-offs and the optimal inflation rate," Journal of Economic Dynamics and Control, Elsevier, vol. 164(C).
    14. Adam, Klaus & Weber, Henning, 2017. "Optimal Trend Inflation," CEPR Discussion Papers 12160, C.E.P.R. Discussion Papers.
    15. Apel, Mikael & Armelius, Hanna & Claussen, Carl Andreas, 2017. "The level of the inflation target – a review of the issues," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue 2, pages 36-56.

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    More about this item

    Keywords

    Optimal Monetary Policy; Inflation; Labor-market Distortions;
    All these keywords.

    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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