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A NOTE ON TREND GROWTH, UNEMPLOYMENT, AND OPTIMAL MONETARY POLICY

Published online by Cambridge University Press:  13 February 2018

Wolfgang Lechthaler  and
Mewael F. Tesfaselassie
Wolfgang Lechthaler
Affiliation:
Kiel Institute for the World Economy
Mewael F. Tesfaselassie*
Affiliation:
Kiel Institute for the World Economy
*
Address correspondence to: Mewael F. Tesfaselassie, Kiel Institute for the World Economy, Kiellinie 66, 24105 Kiel, Germany; e-mail: mewael.tesfaselassie@ifw-kiel.de.
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Abstract

We analyze the implications of trend growth for optimal monetary policy in the presence of search and matching unemployment. We show that trend growth interacts importantly with the inefficiencies stemming from the labor market. Higher trend growth exacerbates the inefficiencies of the labor market and therefore calls for larger deviations from price stability. Our analysis implies that lower trend growth reduces not only the level but also the optimal volatility of the nominal interest rate.

Keywords

Trend GrowthUnemploymentOptimal Monetary PolicyLabor Market FrictionsPolicy Trade-Off
Type
Notes
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019 , pp. 1703 - 1719
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

Financial support from the German Research Foundation within the project “Trend Productivity Growth and Labor Market Frictions in a New Keynesian Business Cycle Model” is gratefully acknowledged. We would like to thank Eric Schaling, Christian Merkl, Ignat Stepanok, and Carl Walsh for helpful comments. All the remaining errors are ours.

References

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