How Much Inflation is Necessary to Grease the Wheels?

Jinill Kim and Francisco Ruge-Murcia

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

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: Optimal inflation; asymmetric adjustment costs; nonlinear dynamics (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: How much inflation is necessary to grease the wheels? (2009)
Working Paper: How Much Inflation is Necessary to Grease the Wheels? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:11-2007

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