How much inflation is necessary to grease the wheels?

Jinill Kim () and Francisco J. Ruge-Murcia ()

Journal of Monetary Economics, 2009, vol. 56, issue 3, pages 365-377

Abstract: Tobin's proposition that inflation "greases" the wheels of the labor market is studied using a simple dynamic stochastic general equilibrium model with asymmetric wage adjustment costs. The simulated method of moments is used to estimate the nonlinear model based on its second-order approximation. Optimal inflation is determined by a benevolent government that maximizes the households' welfare. Econometric results indicate that nominal wages are downwardly rigid and that the optimal level of grease inflation for the U.S. economy is about 0.35% per year, with a 95% confidence interval ranging from 0.04% to 0.87%.

Keywords: Optimal; inflation; Asymmetric; adjustment; costs; Downward; wage; rigidity; Nonlinear; dynamics (search for similar items in EconPapers)
Date: 2009
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Related works:
Working Paper: How Much Inflation is Necessary to Grease the Wheels? (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:3:p:365-377

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