Work

Downward nominal wage rigidity and the optimal inflation target

Year: 2025

Type: article

Abstract: I investigate the welfare maximizing steady-state inflation rate in a heterogeneous-agent New Keynesian model with Downward Nominal Wage Rigidity (DNWR). After matching the annual wage change distribution in the U.S., I demonstrate that DNWR has a significant impact on the economy, particularly when the inflation target is set low. The optimal inflation rate is estimated to be as high as 8.8%, and increasing the inflation target to the optimal level yields a welfare gain of nearly 3.50%. While the results exhibit sensitivity to parameterization, a broad range of calibrations indicates that the optimal inflation rate is consistently above 3%.

Source: Macroeconomic Dynamics

DOI: 10.1017/s1365100525000264

Author: Emrehan Aktug

Institution: Sabancı Üniversitesi

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,550