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Labour markets, liquidity, and monetary policy regimes

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  • Dave Andolfatto
  • Scott Hendry
  • Kevin Moran

Abstract

We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the labour market. The information friction increases the persistence in the response of interest rates following monetary policy regime shifts. This occurs because agents have incomplete information about the nature of the shifts and optimally update their inflation forecasts using an `adaptive' expectations rule. The search friction transmits the interest rate movements to the labour market by affecting job creation activities; together, the two frictions imply that unemployment reacts very gradually to monetary policy shocks.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 2 (May)
Pages: 392-420

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Handle: RePEc:cje:issued:v:37:y:2004:i:2:p:392-420

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References

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  1. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 871-80, December.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago WP-97-18, Federal Reserve Bank of Chicago.
  3. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers, University of California at Berkeley 89-107, University of California at Berkeley.
  4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  5. Andolfatto, David & Scott Hendry & Kevin Moran, 2002. "Inflation Expectations and Learning about Monetary Policy," Working Papers, Bank of Canada 02-30, Bank of Canada.
  6. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
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  15. Merz, Monika, 1997. "A market structure for an environment with heterogeneous job-matches, indivisible labor and persistent unemployment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(4-5), pages 853-872, May.
  16. Stephen R. G. Jones, 1993. "Cyclical and Seasonal Properties of Canadian Gross Flows of Labour," Canadian Public Policy, University of Toronto Press, vol. 19(1), pages 1-17, March.
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  18. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 676-90, September.
  19. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 314-352, August.
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Citations

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Cited by:
  1. Randall Wright & Guido Menzio & Aleksander Berentsen, 2008. "Inflation and Unemployment in the Long Run," 2008 Meeting Papers 34, Society for Economic Dynamics.
  2. Sylvain Dessy & Safa Ragued, 2013. "Multidimensional Poverty Targeting," Cahiers de recherche, CIRPEE 1340, CIRPEE.
  3. David Andolfatto & Scott Hendry & Kevin Moran, 2005. "Are Inflation Expectations Rational?," Macroeconomics, EconWPA 0501002, EconWPA.
  4. Robert Amano & Scott Hendry, 2003. "Inflation persistence and costly market share adjustment: a preliminary analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 134-146 Bank for International Settlements.

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