How much Inflation is Necessary to Grease the Wheels?

Publicado en

  • Journal of Monetary Economics


  • 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%.

fecha de publicación

  • 2009

Líneas de investigación

  • Asymmetric Adjustment Costs
  • Downward Wage Rigidity
  • Nonlinear Dynamics
  • Optimal Inflation

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