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Labor market frictions and optimal steady-state inflation

2016; Elsevier BV; Volume: 78; Linguagem: Inglês

10.1016/j.jmoneco.2016.01.002

1873-1295

Mikael Carlsson, Andreas Westermark,

Economic Theory and Policy

In central theories of monetary non-neutrality, the Ramsey optimal steady-state 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 1.16 percent per year.