How much inflation is necessary to grease the wheels?

Jinill Kim, Francisco J. Ruge-Murcia

Research output: Contribution to journalArticle

35 Citations (Scopus)

Abstract

Tobin's proposition that inflation "greases" the wheels of the labor market is studied using a simple dynamic stochastic general equilibrium model with asymmetric wage adjustment costs. The simulated method of moments is used to estimate the nonlinear model based on its second-order approximation. Optimal inflation is determined by a benevolent government that maximizes the households' welfare. Econometric results indicate that nominal wages are downwardly rigid and that the optimal level of grease inflation for the U.S. economy is about 0.35% per year, with a 95% confidence interval ranging from 0.04% to 0.87%.

Original languageEnglish
Pages (from-to)365-377
Number of pages13
JournalJournal of Monetary Economics
Volume56
Issue number3
DOIs
Publication statusPublished - 2009 Apr

Keywords

  • Asymmetric adjustment costs
  • Downward wage rigidity
  • Nonlinear dynamics
  • Optimal inflation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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