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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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Cited by:
  1. Aleksander Berentsen & Guido Menzio & Randall Wright, 2009. "Inflation and Unemployment in the Long Run," Kiel Working Papers 1501, Kiel Institute for the World Economy.
  2. Sylvain Dessy & Safa Ragued, 2013. "Multidimensional Poverty Targeting," Cahiers de recherche 1340, CIRPEE.
  3. David Andolfatto & Scott Hendry & Kevin Moran, 2007. "Are Inflation Expectations Rational?," Working Paper Series 27-07, The Rimini Centre for Economic Analysis.
  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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