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Ramsey monetary policy with labor market frictions

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  • Faia, Ester

Abstract

Traditional New Keynesian models prescribe that optimal monetary policy should aim at price stability. In the absence of a labor market frictions, the monetary authority faces no unemployment/inflation trade-off. The design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market. Optimal policy features deviations from price stability in response to both productivity and government expenditure shocks. When the Hosios [1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279-298] condition is not met, search externalities make the flexible price allocation unfeasible. Optimal deviations from price stability increase with workers' bargaining power, as firms incentives to post vacancies fall and unemployment fluctuates above the Pareto efficient one.

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  • Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
    • Handle: RePEc:eee:moneco:v:56:y:2009:i:4:p:570-581
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    More about this item

    Keywords

    Optimal monetary policy Matching frictions Congestion externality;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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