Labor-Market Frictions and Optimal Inflation

Mikael Carlsson and Andreas Westermark

No 259, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: In central theories of monetary non-neutrality the Ramsey optimal inflation rate varies between the negative of the real interest rate and zero. This paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription. We show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive. Specifically, for a standard U.S. calibration, we find a Ramsey optimal inflation rate of 1.11 percent per year.

Keywords: Optimal Monetary Policy; Inflation; Labor-market Distortions (search for similar items in EconPapers)
JEL-codes: E52 H21 J60 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2012-03-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0259

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