Optimal Monetary Policy under Rigid Wages and Decreasing Returns

Britta Kohlbrecher

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: This paper is the first to study optimal Ramsey monetary policy in a search and matching model that combines real wage rigidity and decreasing returns to scale in production. Adding decreasing returns to scale significantly reduces the trade-off between employment and inflation stabilization usually associated with real wage rigidity. As firms adjust employment in response to an aggregate productivity shock, the resulting change in the marginal product of labor partly offsets the effect of a rigid real wage on marginal costs. The effect is quantitatively important. Optimal inflation volatility is reduced by a factor of four compared to a model with constant returns.

JEL-codes: E24 E52 J64 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc16:145867

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