Journal Article

A Note on Trend Growth, Unemployment and Optimal Monetary Policy

Authors

  • Wolfgang Lechthaler
  • Mewael Tesfaselassie
Publication Date

We analyze the implications of trend growth for optimal monetary policy in the

presence of search and matching unemployment. We show that trend growth inter-

acts 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.

Info

JEL Classification
E24, E52
DOI
10.1017/S1365100517000402

Key Words

  • labor market frictions
  • Optimal Monetary Policy
  • policy trade-off
  • trend growth
  • unemployment