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Optimal monetary policy rules with labor market frictions

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Faia, Ester

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Abstract

This paper studies optimal monetary policy rules in a framework with sticky prices, matching frictions and real wage rigidities. Optimal policy is given by a constrained Ramsey plan in which the monetary authority maximizes the agents' welfare subject to the competitive economy relations and the assumed monetary policy rule. I find that the optimal rule should respond to unemployment alongside with inflation. This is so since models with matching frictions (unlike standard new Keynesian models) feature a congestion externality that makes unemployment inefficiently high. A strong response to inflation remains optimal while a response to output is always welfare detrimental.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 5 (May)
Pages: 1600-1621
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Handle: RePEc:eee:dyncon:v:32:y:2008:i:5:p:1600-1621

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Takushi Kurozumi & Willem Van Zandweghe, 2008. "Labor market search and interest rate policy," Research Working Paper RWP 08-03, Federal Reserve Bank of Kansas City. [Downloadable!]
  2. David M. Arseneau & Sanjay K. Chugh, 2008. "Competitive search equilibrium in a DSGE model," International Finance Discussion Papers 929, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Ester Faia, 2009. "Oligopolistic Competition and Optimal Monetary Policy," Kiel Working Papers 1552, Kiel Institute for the World Economy. [Downloadable!]
  4. Marianna Riggi, 2007. "New Keynesian models with labor market rigidities: a critical survey," Working Papers 102, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
  5. Ester Faia & Lorenza Rossi, 2009. "Unions Power, Collective Bargaining and Optimal Monetary Policy," Kiel Working Papers 1490, Kiel Institute for the World Economy. [Downloadable!]
  6. Federico Ravenna & Carl E. Walsh, 2007. "Vacancies, Unemployment, and the Phillips Curve," Kiel Working Papers 1362, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  7. Herings P. Jean-Jacques & Peeters Ronald & Yang Michael S., 2009. "Piracy on the internet: Accommodate it or fight it? A dynamic approach," Research Memoranda 034, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  8. Abo-Zaid, Salem, 2009. "Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets
    [Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets]    ," MPRA Paper 17489, University Library of Munich, Germany. [Downloadable!]
  9. Rasmus Rüffer & Marcelo Sánchez & Jian-Guang Shen, 2007. "Emerging Asia’s growth and integration - how autonomous are business cycles?," Working Paper Series 715, European Central Bank. [Downloadable!]
  10. Faia, Ester & Lechthaler, Wolfgang & Merkl, Christian, 2009. "Labor Turnover Costs, Workers' Heterogeneity, and Optimal Monetary Policy," IZA Discussion Papers 4322, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Ester Faia, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 707, European Central Bank. [Downloadable!]
    Other versions:
  12. Federico Ravenna & Carl E. Walsh, 2009. "The welfare consequences of monetary policy," Working Paper Series 2009-12, Federal Reserve Bank of San Francisco. [Downloadable!]
  13. Christian Merkl, 2009. "The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed?," Kiel Working Papers 1495, Kiel Institute for the World Economy. [Downloadable!]
  14. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2008. "Monetary Persistence and the Labor Market: A New Perspective," IZA Discussion Papers 3513, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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