Revisiting the optimal inflation rate with downward nominal wage rigidity: The role of heterogeneity

Tomohide Mineyama

Journal of Economic Dynamics and Control, 2022, vol. 139, issue C

Abstract: In this paper, I study the optimal inflation rate in a sticky price economy where workers are heterogeneous in labor productivity and wage changes are subject to asymmetric adjustment costs. The model calibrated to U.S. micro wage data implies downward nominal wage rigidity (DNWR). The optimal inflation rate is substantially higher than stated in the literature in the presence of worker heterogeneity. A key to understanding the result is that DNWR causes a cross-sectional misallocation of labor as well as inefficient aggregate dynamics, enlarging the “grease the wheels” effect of inflation.

JEL-codes: E24 E31 E52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:139:y:2022:i:c:s0165188922000550

DOI: 10.1016/j.jedc.2022.104350

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