Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-27T10:36:30.943Z Has data issue: false hasContentIssue false
  • English
  • Français

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.
Get access Rights & Permissions [Opens in a new window]

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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

REFERENCES

Aghion, P. and Howitt, P. (1994) Growth and unemployment. Review of Economic Studies 61, 477–494.Google Scholar
Amano, R., Moran, K., Murchison, M., and Rennison, A. (2009) Trend inflation, wage and price rigidities, and productivity growth. Journal of Monetary Economics 56, 353–364.Google Scholar
Andolfatto, D. (1996) Business cycles and labor market search. American Economic Review 86 (1), 112–132.Google Scholar
Arsenau, D. and Chugh, S. (2012) Tax smoothing in frictional labor markets. Journal of Political Economy 120 (5), 926–985.Google Scholar
Blanchard, O. and Gal, J. (2010) Labor markets and monetary policy: A new Keynesian model with unemployment. American Economic Journal: Macroeconomics 2 (2), 1–30.Google Scholar
Costain, J. and Reiter, M. (2008) Business cycles, unemployment insurance, and the calibration of matching models. Journal of Economic Dynamics and Control 32 (4), 1120–1155.Google Scholar
Faia, E. (2009) Ramsey monetary policy with labour market frictions. Journal of Monetary Economics 56 (4), 570–581.Google Scholar
Faia, E., Lechthaler, W., and Merkl, C. (2014) Labor selection, turnover costs, and optimal monetary policy. Journal of Money, Credit and Banking 46 (1), 115–144.Google Scholar
Fernald, J. (2014) Productivity and Potential Output Before, During, and After the Great Recession. Technical report, National Bureau of Economic Research.Google Scholar
Gordon, R. (2014) The Demise of U. S. Economic Growth: Restatement, Rebuttal, and Reflections. Technical report, National Bureau of Economic Research.Google Scholar
Hagedorn, M. and Manovskii, I. (2008) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98 (4), 1692–1706.Google Scholar
Hamilton, J., Harris, E., Hatzius, J., and West, K. (2015) The Equilibrium Real Funds Rate: Past, Present and Future. Technical report, National Bureau of Economic Research.Google Scholar
Hosios, A. (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279–298.Google Scholar
Krause, M. and Lubik, T. (2007) The (ir)relevance of real wage rigidity in the new Keynesian model with search frictions. Journal of Monetary Economics 54 (3), 706–727.Google Scholar
Lechthaler, W. and Snower, D. (2013) Quadratic labor adjustment costs, business cycle dynamics and optimal monetary policy. Macroeconomic Dynamics 17 (2), 464–475.Google Scholar
Lechthaler, W. and Tesfaselassie, M. (2015) Trend Growth, Unemployment and Optimal Monetary Policy. Kiel working paper 2003.Google Scholar
OECD (2015) The Future of Productivity. Available at: http://dx.doi.org/10.1787/9789264248533-en.Google Scholar
Pissarides, C. (2000) Equilibrium Unemployment Theory, 2nd ed. Cambridge, MA: The MIT Press.Google Scholar
Pissarides, C. and Vallanti, G. (2007) The impact of tfp growth on steady-state unemployment. International Economic Review 1, 733–753.Google Scholar
Ravenna, F. and Walsh, C. (2011) Welfare-based optimal monetary policy with unemployment and sticky prices: A linear-quadratic framework. American Economic Journal: Macroeconomics 3 (2), 130–162.Google Scholar
Shimer, R. (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1), 25–49.Google Scholar
Snower, D. and Tesfaselassie, M. (2017) Job turnover, trend growth and the long-run Phillips curve. Macroeconomic Dynamics 21 (4), 835–861.Google Scholar
Tesfaselassie, M. (2013) Trend productivity growth and the government spending multiplier. Journal of Macroeconomics 37, 197–207.Google Scholar
Tesfaselassie, M. (2014) Growth and Unemployment in the Presence of Trend Inflation. Kiel working paper 1978.Google Scholar
Thomas, C. (2008) Search and matching frictions and optimal monetary policy. Journal of Monetary Economics 55, 936–956.Google Scholar
Walsh, C. (2005) Labor market search, sticky prices, and interest rate policies. Review of Economic Dynamics 8, 829–849.Google Scholar