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Labor market search, the Taylor principle, and indeterminacy

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  • Kurozumi, Takushi
  • Van Zandweghe, Willem

Abstract

In a sticky-price model with labor market search and matching frictions, forecast-based interest rate policy almost always induces indeterminacy when it is strictly inflation targeting and satisfies the Taylor principle. Indeterminacy is due to a vacancy channel of monetary policy that makes inflation expectations self-fulfilling. The effect of this channel strengthens as the sluggishness of the adjustment of employment relative to that of consumption increases. When this relative sluggishness is high, the Taylor principle fails to ensure determinacy, regardless of whether the policy is forecast-based or outcome-based, whether it is strictly or flexibly inflation targeting, or contains policy rate smoothing.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 7 (October)
Pages: 851-858

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Handle: RePEc:eee:moneco:v:57:y:2010:i:7:p:851-858

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 0707, European Central Bank.
  2. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
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  4. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  5. 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.
  6. Mewael F. Tesfaselassie & Eric Schaling, 2009. "On Determinacy and Learnability in a New Keynesian Model with Unemployment," Kiel Working Papers 1506, Kiel Institute for the World Economy.
  7. Robert E. Hall & Paul R. Milgrom, 2007. "The Limited Influence of Unemployment on the Wage Bargain," Levine's Bibliography 321307000000000135, UCLA Department of Economics.
  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  9. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Center for International Economics, Working Paper Series qt6tg550dv, Center for International Economics, UC Santa Cruz.
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  12. Athanasios Orphanides & Volker Wieland, 2008. "Economic projections and rules of thumb for monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 307-324.
  13. Willem Van Zandweghe, 2009. "On-the-job search, sticky prices, and persistence," Research Working Paper RWP 09-03, Federal Reserve Bank of Kansas City.
  14. Krause, M.U. & Lubik, T.A., 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Discussion Paper 2003-113, Tilburg University, Center for Economic Research.
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  16. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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  18. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  19. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, 02.
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Citations

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Cited by:
  1. Hibiki Ichiue & Takushi Kurozumi & Takeki Sunakawa, 2013. "Inflation Dynamics And Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach For Japan'S Economy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 273-287, 01.
  2. Kurozumi, Takushi & Van Zandweghe, Willem, 2012. "Learning about monetary policy rules when labor market search and matching frictions matter," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 523-535.
  3. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper 2012/07, Norges Bank.
  4. Takushi Kurozumi & Willem Van Zandweghe, 2010. "Determinacy under inflation targeting interest rate policy in a sticky price model with investment (and labor bargaining)," Research Working Paper RWP 10-15, Federal Reserve Bank of Kansas City.

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