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Monetary policy and labor market frictions: A tax interpretation

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  • Ravenna, Federico
  • Walsh, Carl E.

Abstract

Replicating the flexible price allocation in models with nominal rigidities and labor market frictions that lead to an inefficient matching of unemployed workers with job vacancies, even if feasible, is generally not desirable. We characterize the tax instruments that implement the first best allocation and examine the trade-offs faced by monetary policy if these tax instruments are unavailable. Our tax interpretation helps explain why the welfare cost of inefficient labor market search can be large while the incentive to deviate from price stability is small. Gains from deviating from price stability are larger in economies with more volatile labor flows.

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Bibliographic Info

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

Volume (Year): 59 (2012)
Issue (Month): 2 ()
Pages: 180-195

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Handle: RePEc:eee:moneco:v:59:y:2012:i:2:p:180-195

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

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  10. 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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Cited by:
  1. Lien Laureys, 2014. "Optimal Monetary Policy in the Presence of Human Capital Depreciation during Unemployment," Discussion Papers 1415, Centre for Macroeconomics (CFM).
  2. Chugh, Sanjay K., 2013. "Costly external finance and labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2882-2912.

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