Ramsey monetary policy with labour market frictions : [This draft: March 2009]

  • Traditional New Keynesian models prescribe that optimal monetary policy should aim at price stability. In the absence of a labor market frictions, the monetary authority faces no unemployment/inflation trade-off. I study the design of optimal monetary policy in a framework with sticky prices and matching frictions in the labor market. Optimal policy features deviations from price stability in response to both productivity and government expenditure shocks. When the Hosios 1990 condition is not met, search externalities make the flexible price allocation unfeasible. Optimal deviations from price stability increase with workers’ bargaining power, as firms´ incentives to post vacancies fall and unemployment fluctuates above the Pareto efficient one.

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Author:Ester FaiaGND
Document Type:Report
Year of Completion:2009
Year of first Publication:2009
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2014/11/27
Tag:congestion externality; matching frictions; optimal monetary policy
Issue:draft: March 2009
Page Number:38
First draft: August 2006. This draft: March 2009
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht