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Labour markets, liquidity, and monetary policy regimes

  • Dave Andolfatto
  • Scott Hendry
  • Kevin Moran

We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the labour market. The information friction increases the persistence in the response of interest rates following monetary policy regime shifts. This occurs because agents have incomplete information about the nature of the shifts and optimally update their inflation forecasts using an `adaptive' expectations rule. The search friction transmits the interest rate movements to the labour market by affecting job creation activities; together, the two frictions imply that unemployment reacts very gradually to monetary policy shocks.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 2 (May)
Pages: 392-420

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Handle: RePEc:cje:issued:v:37:y:2004:i:2:p:392-420
Contact details of provider: Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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