Optimal monetary policy and downward nominal wage rigidity in frictional labor markets
This paper studies the optimal long-run inflation rate in a labor search and matching framework in the presence of downward nominal wage rigidity. Optimal monetary policy features positive inflation in the long run; the optimal annual long-run inflation rate for the U.S. economy is slightly below 1...
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| Veröffentlicht in: | Journal of economic dynamics & control 2013-01, Vol.37 (1), p.345-364 |
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| container_end_page | 364 |
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| container_title | Journal of economic dynamics & control |
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| creator | Zaid, S Abo |
| description | This paper studies the optimal long-run inflation rate in a labor search and matching framework in the presence of downward nominal wage rigidity. Optimal monetary policy features positive inflation in the long run; the optimal annual long-run inflation rate for the U.S. economy is slightly below 1 percent with a money demand motive and around 2 percent otherwise. Positive inflation facilitates real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following adverse productivity shocks. The findings of the paper can also be related to standard Ramsey theory of “wedge smoothing”; with positive inflation under sticky prices, the size and the volatility of the intertemporal wedge are significantly reduced. |
| doi_str_mv | 10.1016/j.jedc.2012.09.003 |
| format | Article |
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Optimal monetary policy features positive inflation in the long run; the optimal annual long-run inflation rate for the U.S. economy is slightly below 1 percent with a money demand motive and around 2 percent otherwise. Positive inflation facilitates real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following adverse productivity shocks. 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| ispartof | Journal of economic dynamics & control, 2013-01, Vol.37 (1), p.345-364 |
| issn | 0165-1889 1879-1743 |
| language | eng |
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| source | ScienceDirect Journals (5 years ago - present) |
| subjects | Demand for money Downward nominal wage rigidity Employment creation Federal Reserve monetary policy Frictional unemployment Inflation rate Inflation rates Intertemporal wedge smoothing Labor economics Labor market Labor market frictions Labour market Labour productivity Long-run inflation rate Monetary policy Optimal monetary policy Real wages Sticky prices Studies U.S.A Wage rigidity |
| title | Optimal monetary policy and downward nominal wage rigidity in frictional labor markets |
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