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Keynesian Inefficiency and Optimal Policy: A New Monetarist Approach

Listed author(s):
  • STEPHEN D. WILLIAMSON

A simple model of monetary/labor search is constructed to study Keynesian indeterminacy and optimal policy. In the model, economic agents have trouble splitting the surplus from exchange appropriately, and we consider monetary and fiscal policies that correct this Keynesian inefficiency. A Taylor rule neither implies determinacy, nor does it support an efficient outcome. An optimal policy yields an efficient and determinate allocation of resources, but equilibrium policy actions, wages, and prices are indeterminate at the optimum.

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File URL: http://hdl.handle.net/10.1111/jmcb.12218
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 47 (2015)
Issue (Month): S2 (06)
Pages: 197-222

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Handle: RePEc:wly:jmoncb:v:47:y:2015:i:s2:p:197-222
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
  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. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, vol. 81(2), pages 314-352, August.
  4. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 441-463.
  5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
  6. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  7. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  8. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
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