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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
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  1. Olivier Jean Blanchard & Jordi Galí, 2005. "Real wage rigidities and the New Keynesian model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Bernardino Adão & Isabel Correia & Pedro Teles, 2001. "Gaps and triangles," Working Paper Series WP-01-13, Federal Reserve Bank of Chicago.
  3. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2000. "Optimal monetary policy," Working Paper 00-10, Federal Reserve Bank of Richmond.
  4. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, 02.
  5. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics.
  6. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 0707, European Central Bank.
  7. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," NBER Working Papers 10326, National Bureau of Economic Research, Inc.
  8. Federico Ravenna & Carl E. Walsh, 2007. "Vacancies, Unemployment, and the Phillips Curve," Kiel Working Papers 1362, Kiel Institute for the World Economy.
  9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  10. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
  11. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Department of Economics, Working Paper Series qt6tg550dv, Department of Economics, UC Santa Cruz.
  12. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  13. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE.
  14. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  15. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  16. repec:oup:restud:v:61:y:1994:i:3:p:397-415 is not listed on IDEAS
  17. repec:oup:restud:v:57:y:1990:i:2:p:279-98 is not listed on IDEAS
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