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Search and Matching Frictions and Optimal Monetary Policy

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Author Info
Carlos Thomas

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Abstract

I analyze optimal monetary policy in an economy with search and matching frictions in thelabor market and staggered nominal wage and price contracts. In this framework, as opposedto the standard New Keynesian model, preset nominal wages need not have any effect onexisting employment relationships. However, staggered bargaining of nominal wages distortsaggregate job creation and creates inefficient dispersion in hiring rates across firms.Targeting zero inflation (the optimal policy in the standard New Keynesian model) onlymagnifies these distortions. The optimal policy allows for non-zero inflation in response toreal shocks, so as to reduce the rigidity of real wages. Quantitatively, the case against pricestability as the sole goal of monetary policy turns out to be important.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0743.

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Date of creation: Dec 2006
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Handle: RePEc:cep:cepdps:dp0743

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Related research
Keywords: search and matching New Keynesian staggered nominal wage bargaining

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General

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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. Carlos Thomas, 2007. "Search Frictions, Real Rigidities and Inflation Dynamics," CEP Discussion Papers dp0822, Centre for Economic Performance, LSE. [Downloadable!]
  2. Federico Ravenna & Carl E. Walsh, 2007. "Vacancies, Unemployment, and the Phillips Curve," Kiel Working Papers 1362, Kiel Institute for the World Economy. [Downloadable!]
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