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Monetary policy and labor market frictions: A tax interpretation

  • Ravenna, Federico
  • Walsh, Carl E.

Replicating the flexible price allocation in models with nominal rigidities and labor market frictions that lead to an inefficient matching of unemployed workers with job vacancies, even if feasible, is generally not desirable. We characterize the tax instruments that implement the first best allocation and examine the trade-offs faced by monetary policy if these tax instruments are unavailable. Our tax interpretation helps explain why the welfare cost of inefficient labor market search can be large while the incentive to deviate from price stability is small. Gains from deviating from price stability are larger in economies with more volatile labor flows.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 2 ()
Pages: 180-195

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Handle: RePEc:eee:moneco:v:59:y:2012:i:2:p:180-195
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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