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Monetary policy and labor market frictions: A tax interpretation

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  • Ravenna, Federico
  • Walsh, Carl E.

Abstract

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.

Suggested Citation

  • Ravenna, Federico & Walsh, Carl E., 2012. "Monetary policy and labor market frictions: A tax interpretation," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 180-195.
  • Handle: RePEc:eee:moneco:v:59:y:2012:i:2:p:180-195
    DOI: 10.1016/j.jmoneco.2012.01.003
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    References listed on IDEAS

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    Cited by:

    1. Lien Laureys, 2014. "Optimal Monetary Policy in the Presence of Human Capital Depreciation during Unemployment," Discussion Papers 1415, Centre for Macroeconomics (CFM).
    2. Davide Debortoli & Jinill Kim & Jesper Lindé & Ricardo Nunes, 2017. "Designing a simple loss function for central banks: Does a dual mandate make sense?," Economics Working Papers 1560, Department of Economics and Business, Universitat Pompeu Fabra.
    3. P. Clerc, 2015. "Credible Wage Bargaining and the Joint Dynamics of Unemployment and Inflation," Working papers 568, Banque de France.
    4. Martin Bodenstein & Gunes Kamber & Christoph Thoenissen, 2016. "Commodity prices and labour market dynamics in small open economies," CAMA Working Papers 2016-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. repec:fip:fedkrw:15-05 is not listed on IDEAS
    6. Pedro, Gomis-Porqueras, 2016. "Fiscal Requirements for Price Stability in Economies with Private Provision of Liquidity and Unemployment," MPRA Paper 75113, University Library of Munich, Germany.
    7. Chugh, Sanjay K., 2013. "Costly external finance and labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2882-2912.
    8. Troy Davig & Refet S. Gürkaynak, 2015. "Is Optimal Monetary Policy Always Optimal?," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 353-382, September.
    9. Raissi, Mehdi, 2015. "Flexible inflation targeting and labor market inefficiencies," Economic Modelling, Elsevier, vol. 46(C), pages 283-300.
    10. Carl Walsh, 2014. "Multiple Objectives and Central Bank Tradeoffs under Flexible Inflation Targeting," CESifo Working Paper Series 5097, CESifo Group Munich.
    11. Sergio A. Lago Alves, 2016. "Monetary Policy, Trend Inflation and Unemployment Volatility," Working Papers Series 450, Central Bank of Brazil, Research Department.
    12. Arnildo Da Silva Correa & Sergio Afonso Lago Alves, 2016. "A Tale Of Three Gaps: Unemployment, Capacity Utilization And Output," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42ndd Brazilian Economics Meeting] 031, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    13. Antoine Lepetit, 2018. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs," Working Papers hal-01536416, HAL.
    14. Carlsson, Mikael & Westermark, Andreas, 2016. "Labor market frictions and optimal steady-state inflation," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 67-79.

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