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Learning about monetary policy rules when labor market search and matching frictions matter

  • Kurozumi, Takushi
  • Van Zandweghe, Willem

This paper examines the implications of labor market search and matching frictions for determinacy and E-stability of rational expectations equilibrium (REE) in a sticky price model with interest rate policy. When labor adjustment takes place solely at the extensive margin, forecast-based policy that meets the Taylor principle is likely to induce indeterminacy and E-instability, regardless of whether it is strictly or flexibly inflation targeting. When labor adjustment takes place at both the extensive and intensive margins, the strictly inflation-forecast targeting policy remains likely to induce indeterminacy, but it generates a unique E-stable fundamental REE as long as the Taylor principle is satisfied. Therefore, the presence of search and matching frictions changes the determinacy properties of a strictly inflation-forecast targeting policy, and alters its E-stability properties when only an extensive margin is present but not when labor adjustment takes place at both margins.

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

Volume (Year): 36 (2012)
Issue (Month): 4 ()
Pages: 523-535

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:4:p:523-535
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