A NOTE ON TREND GROWTH, UNEMPLOYMENT, AND OPTIMAL MONETARY POLICY

Wolfgang Lechthaler and Mewael F. Tesfaselassie

Macroeconomic Dynamics, 2019, vol. 23, issue 4, 1703-1719

Abstract: We analyze the implications of trend growth for optimal monetary policy in the presence of search and matching unemployment. We show that trend growth interacts importantly with the inefficiencies stemming from the labor market. Higher trend growth exacerbates the inefficiencies of the labor market and therefore calls for larger deviations from price stability. Our analysis implies that lower trend growth reduces not only the level but also the optimal volatility of the nominal interest rate.

Date: 2019
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