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Labour markets, liquidity, and monetary policy regimes

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  • Dave Andolfatto
  • Scott Hendry
  • Kevin Moran

Abstract

. We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the labour market. The information friction increases the persistence in the response of interest rates following monetary policy regime shifts. This occurs because agents have incomplete information about the nature of the shifts and optimally update their inflation forecasts using an ‘adaptive’ expectations rule. The search friction transmits the interest rate movements to the labour market by affecting job creation activities; together, the two frictions imply that unemployment reacts very gradually to monetary policy shocks. JEL Classification: E4, E5 Marchés du travail, liquidité, et régimes de politiques monétaires. Les auteurs développent un modèle d’équilibre général du mécanisme de transmission des effets de la politique monétaire qui souligne les frictions informationnelles dans le marché de la monnaie et les frictions dans le processus de recherche d’emploi dans le marché du travail. Un changement dans le régime de politique monétaire, qu’on présente ici comme une réduction exogène dans le taux cible à long terme de la croissance du stock de monnaie se traduit par un manque persistant de liquidité et un accroissement persistant du taux d’intérêt. Cette persistance se produit parce que les agents ont une information incomplète quant à la nature du choc, ce qui les amène à optimiser l’ajustement de leur prévision d’inflation en utilisant une règle d’anticipations adaptatives. La période de haut taux d’intérêt réduit les activités de création d’emploi dans le secteur des affaires, rendant la tâche de se trouver un emploi adéquat plus difficile pour les chômeurs; en conséquence, le chômage s’accroît et atteint son sommet trois trimestres après le changement dans le régime. A long terme cependant, le processus d’ajustement fait que les prévisions d’inflation des agents privés convergent vers les valeurs effectives; le chômage tombe sous son niveau initial, en raison du taux d’intérêt plus bas associé au régime monétaire de rigueur.

Suggested Citation

  • Dave Andolfatto & Scott Hendry & Kevin Moran, 2004. "Labour markets, liquidity, and monetary policy regimes," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(2), pages 392-420, May.
  • Handle: RePEc:wly:canjec:v:37:y:2004:i:2:p:392-420
    DOI: 10.1111/j.0008-4085.2004.00008.x
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    Cited by:

    1. Lafuente, Juan A. & Pérez, Rafaela & Ruiz, Jesús, 2016. "Monetary policy regimes and the forward bias for foreign exchange," Journal of Economics and Business, Elsevier, vol. 85(C), pages 13-28.
    2. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    3. Andolfatto, David & Hendry, Scott & Moran, Kevin, 2008. "Are inflation expectations rational?," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 406-422, March.
    4. Moran, Kevin & Nono, Simplice Aimé, 2018. "Gradual learning about shocks and the forward premium puzzle," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 79-100.
    5. Sylvain Dessy & Safa Ragued, 2013. "Whither the Progressive Tax?," Cahiers de recherche 1340, CIRPEE.
    6. Robert Amano & Scott Hendry, 2003. "Inflation persistence and costly market share adjustment: a preliminary analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 134-146, Bank for International Settlements.

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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