TY - JOUR
T1 - Monetary policy when wages are downwardly rigid
T2 - Friedman meets Tobin
AU - Kim, Jinill
AU - Ruge-Murcia, Francisco J.
N1 - Funding Information:
We received helpful comments from Shigenori Shiratsuka; Oleksiy Kryvtsov; and participants in seminars at the Bank of Canada, the National Bank of Belgium, McGill University, the Annual Conference of the Canadian Economics Association (Toronto), and the JEDC conference on Frontiers in Structural Macroeconomic Modeling. The financial support of the Social Sciences and Humanities Research Council is gratefully acknowledged. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.
PY - 2011/12
Y1 - 2011/12
N2 - Monetary policy in an economy with both downwardly rigid wages and a transaction motive for money demand is studied using a dynamic stochastic general equilibrium model. The two key features of the model imply that both Tobin's "inflation grease" argument and Friedman's rule are operative, and so optimal inflation may be positive or negative. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Results indicate that the Ramsey policy that maximizes social welfare involves an average inflation rate of about 0.4% per year. In the more realistic case where a central banker follows a simple targeting policy, the optimal inflation target is about 1% per year. We view this result as providing support for the low, but strictly positive, inflation targets used in many countries.
AB - Monetary policy in an economy with both downwardly rigid wages and a transaction motive for money demand is studied using a dynamic stochastic general equilibrium model. The two key features of the model imply that both Tobin's "inflation grease" argument and Friedman's rule are operative, and so optimal inflation may be positive or negative. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Results indicate that the Ramsey policy that maximizes social welfare involves an average inflation rate of about 0.4% per year. In the more realistic case where a central banker follows a simple targeting policy, the optimal inflation target is about 1% per year. We view this result as providing support for the low, but strictly positive, inflation targets used in many countries.
KW - Asymmetric effects of monetary policy
KW - Downward nominal wage rigidity
KW - Nonlinear dynamics
KW - Optimal inflation
UR - http://www.scopus.com/inward/record.url?scp=82355175860&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2011.08.002
DO - 10.1016/j.jedc.2011.08.002
M3 - Article
AN - SCOPUS:82355175860
SN - 0165-1889
VL - 35
SP - 2064
EP - 2077
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 12
ER -