Published online by Cambridge University Press: 08 April 2016
The paper reexamines the long-run Phillips curve in a New Keynesian model with job turnover and trend productivity growth. We show that an increase in money growth has substantial positive effects on steady state output, consumption, and employment in the presence of (i) observed job turnover rates and, if consumption smoothing is sufficiently strong, (ii) observed productive growth rates. Furthermore, we show that the optimal inflation rate is slightly under 2% for reasonable calibrations of job turnover and trend growth.
Financial support from the German Science Foundation within the project “Trend Productivity Growth and Labor Market Frictions in a New Keynesian Business Cycle Model” is gratefully acknowledged.