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Labor Market Frictions, Indeterminacy, and Interest Rate Rules

  • Zanetti, Francesco

This paper studies the emergence of indeterminate equilibria in a standard New Keynesian model characterized by labor market frictions, under a policy rule that reacts strictly to inflation. Given labor market frictions, monetary policy may not be able to prevent aggregate fluctuations from being driven solely by self-fulfilling expectations. This is not, though, a result that holds under all circumstances: a monetary policy that reacts to some average measures of inflation or to the output gap may guarantee determinacy in the economy.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0098
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 7 (October)
Pages: 1959-1970

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:7:p:1959-1970
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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