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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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  1. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "Optimal monetary policy," Working Papers 01-5, Federal Reserve Bank of Philadelphia.
  2. Marvin Goodfriend & Robert G. King, 2001. "The Case for Price Stability," NBER Working Papers 8423, National Bureau of Economic Research, Inc.
  3. V.V. Chari & Patrick J. Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," NBER Working Papers 10351, National Bureau of Economic Research, Inc.
  4. 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.
  5. Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
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  8. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," NBER Working Papers 10326, National Bureau of Economic Research, Inc.
  9. Carl Walsh & Federico Ravenna, 2007. "Vacancies, Unemployment, and the Phillips Curve," 2007 Meeting Papers 1014, Society for Economic Dynamics.
  10. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  11. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations With Staggered Nash Wage Bargaining," NBER Working Papers 12498, National Bureau of Economic Research, Inc.
  12. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  13. Adão, Bernardino & Correia, Isabel & Teles, Pedro, 2001. "Gaps and Triangles," CEPR Discussion Papers 2668, C.E.P.R. Discussion Papers.
  14. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE.
  15. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  16. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Center for International Economics, Working Paper Series qt6tg550dv, Center for International Economics, UC Santa Cruz.
  17. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
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