How Much Inflation is Necessary to Grease the Wheels?

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

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper studies Tobin's proposition that inflation "greases" the wheels of the labor market. The analysis is carried out using a simple dynamic stochastic general equilibrium model with asymmetric wage adjustment costs. Optimal inflation is determined by a benevolent government that maximizes the households' welfare. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Econometric results indicate that nominal wages are downwardly rigid and that the optimal level of grease inflation for the U.S. economy is about 1.2 percent per year, with a 95% confidence interval ranging from 0.2 to 1.6 percent.

Keywords: Oimal inflation; asymmetric adjustment costs; nonlinear dynamics (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2007
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Related works:
Journal Article: How much inflation is necessary to grease the wheels? (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:mtl:montde:2007-10

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