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Search Frictions, Job Flows and Optimal Monetary Policy

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  • Shoujian Zhang

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    (University of St Andrews)

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    Abstract

    Job creation and job destruction are investigated in an economy featured by search frictions in both labour and goods markets. We show that both the unemployment rate and the endogenous job destruction rate increase when the inflation rate rises, because the demand declines due to the increase in the cost of holding money. Our numerical exercises suggest that the destruction of lower productivity jobs and the creation of higher productivity jobs may be inefficiently low under the zero nominal interest rate, which in turn causes the deviation of optimal long run monetary policy from the Friedman rule.

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    File URL: http://www.st-andrews.ac.uk/economics/repecfiles/2/1402.pdf
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    Bibliographic Info

    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201402.

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    Date of creation: 12 Mar 2014
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    Handle: RePEc:san:cdmawp:1402

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    Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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    Web page: http://www.st-andrews.ac.uk/cdma
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    Keywords: inflation; search frictions; money; welfare;

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    1. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    2. Olivier Blanchard & Jordi Galí, 2006. "Labor markets and monetary policy: A new-Keynesian model with unemployement," Economics Working Papers 1076, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2008.
    3. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    4. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    5. Sveen, Tommy & Weinke, Lutz, 2008. "New Keynesian perspectives on labor market dynamics," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 921-930, July.
    6. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
    7. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
    8. Shouyong Shi, 2006. "Viewpoint: A microfoundation of monetary economics," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 643-688, August.
    9. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
    10. Alok Kumar, 2013. "Labor Markets, Unemployment and Optimal Inflation," Department Discussion Papers 1303, Department of Economics, University of Victoria.
    11. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers 966, Queen's University, Department of Economics.
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