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Labor Market Frictions and Optimal Monetary Policy

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  • Alon Binyamini

    (Bank of Israel)

Abstract

We study the properties of optimal monetary policy in an environment of nominal wage rigidity and unemployment. We show that nominal wage rigidity increases the sacrice ratio, and therefore reduces the eâ„ectiveness of sacricing employment in order to stabilize ination. It follows that in response to higher nominal wage rigidity, it is optimal to allow for smaller uctuations of unemployment at the expense of larger ination uctuations.

Suggested Citation

  • Alon Binyamini, 2013. "Labor Market Frictions and Optimal Monetary Policy," Bank of Israel Working Papers 2013.02, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2013.02
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Search; Matching; Business cycles; Monetary policy;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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