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Optimal monetary policy in a new Keynesian model with job search

  • Tang, Jenn-Hong
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    This paper studies the implications for optimal monetary policy of introducing job search into the new Keynesian framework. Using the linear-quadratic approach described by Benigno and Woodford (2008), we derive a utility-based loss function that indicates that the goals of policymakers can be represented by the stabilization of inflation, output, employment, and labor-market tightness. We characterize the policy that is optimal from a timeless perspective. Complete inflation stabilization is optimal if the distortions caused by monopolistic competition and search externalities are eliminated. In cases where search externalities prevail, either in or out of the steady state, complete inflation stabilization is no longer optimal, and the optimal responses of inflation to aggregate shocks may depend on labor-market fundamentals.

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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 3 (March)
    Pages: 330-353

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    Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:330-353
    Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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