Optimal inflation rate and fair wage

This paper studies the optimal inflation rate in a New Keynesian model where workers' effort depends on the change in nominal wage. The main finding is that under plausible parameter values, the optimal long -run inflation rate can be positive and well above zero. This result holds when technology growth is so high that the downward wage rigidity or the zero lower bound on the interest rate would not be relevant. Also, we find that the effort effect dampens macroeconomic fluctuations. This contrasts with the existing lit-erature, which predicts the opposite result. (c) 2023 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.