IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework

Listed author(s):
  • Federico Ravenna
  • Carl E. Walsh

We derive a linear-quadratic model that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how welfare costs are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We show the labor market structure has important implications for optimal monetary policy. (JEL E24, E31, E52)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.2.130
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/data/2009-0213_data.zip
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/app/2009-0213_app.pdf
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 2 (April)
Pages: 130-162

as
in new window

Handle: RePEc:aea:aejmac:v:3:y:2011:i:2:p:130-62
Note: DOI: 10.1257/mac.3.2.130
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
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.:

as in new window
  1. Chéron, A. & Langot, François, 1999. "The Phillips and Beveridge curves revisited," CEPREMAP Working Papers (Couverture Orange) 9905, CEPREMAP.
  2. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  3. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2006. "Wage Rigidity and Job Creation," 2006 Meeting Papers 773, Society for Economic Dynamics.
  4. 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.
  5. Blanchard, Olivier J & Galí, Jordi, 2005. "Real Wage Rigidities and the New Keynesian Model," CEPR Discussion Papers 5375, C.E.P.R. Discussion Papers.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  7. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
  8. Athanasios Orphanides & John C. Williams, 2007. "Inflation Targeting under Imperfect Knowledge," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 4, pages 077-123 Central Bank of Chile.
  9. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March.
  10. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
  11. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
  12. Mark Gertler & Antonella Trigari, 2006. "Unemployment fluctuations with staggered Nash wage bargaining," Proceedings, Federal Reserve Bank of San Francisco, pages -.
  13. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," NBER Working Papers 14621, National Bureau of Economic Research, Inc.
  14. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc.
  15. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  16. Carl Walsh & Federico Ravenna, 2007. "Vacancies, Unemployment, and the Phillips Curve," 2007 Meeting Papers 1014, Society for Economic Dynamics.
  17. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  18. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  19. Federico Ravenna & Carl E. Walsh, 2009. "The welfare consequences of monetary policy," Working Paper Series 2009-12, Federal Reserve Bank of San Francisco.
  20. Faia, Ester, 2006. "Optimal monetary policy rules with labor market frictions," Working Paper Series 0698, European Central Bank.
  21. Krause, Michael & López-Salido, José David & Lubik, Thomas A., 2007. "Do Search Frictions Matter for Inflation Dynamics?," Kiel Working Papers 1353, Kiel Institute for the World Economy (IfW).
  22. Sala, Luca & Söderström, Ulf & Trigari, Antonella, 2008. "Monetary Policy Under Uncertainty in an Estimated Model with Labour Market Frictions," CEPR Discussion Papers 6826, C.E.P.R. Discussion Papers.
  23. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
  24. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
  25. Ben S. Bernanke & Julio J. Rotemberg, 1997. "Editorial in "NBER Macroeconomics Annual 1997, Volume 12"," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 1-6 National Bureau of Economic Research, Inc.
  26. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
  27. Mortensen, Dale T, 1970. "Job Search, the Duration of Unemployment, and the Phillips Curve," American Economic Review, American Economic Association, vol. 60(5), pages 847-862, December.
  28. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  29. 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.
  30. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  31. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  32. Trigari, Antonella, 2004. "Equilibrium unemployment, job flows and inflation dynamics," Working Paper Series 0304, European Central Bank.
  33. 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.
  34. Rochelle M. Edge, 2003. "A utility-based welfare criterion in a model with endogenous capital accumulation," Finance and Economics Discussion Series 2003-66, Board of Governors of the Federal Reserve System (U.S.).
  35. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  36. Ben S. Bernanke & Julio J. Rotemberg, 1997. "NBER Macroeconomics Annual 1997, Volume 12," NBER Books, National Bureau of Economic Research, Inc, number bern97-1.
Full references (including those not matched with items on IDEAS)

When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:3:y:2011:i:2:p:130-62. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.