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Labor Market Search, Sticky Prices, and Interest Rate Policies

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  • Walsh, Carl E.

Abstract

In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.

Suggested Citation

  • Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Department of Economics, Working Paper Series qt6tg550dv, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt6tg550dv
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    References listed on IDEAS

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    Cited by:

    1. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312, National Bureau of Economic Research, Inc.
    2. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Unemployment in an Estimated New Keynesian Model," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 329-360.
    3. Junichi Fujimoto & Ko Munakata & Koji Nakamura & Yuki Teranishi, 2017. "Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search," GRIPS Discussion Papers 16-30, National Graduate Institute for Policy Studies.
    4. Jordi Galí, 2011. "The Return Of The Wage Phillips Curve," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 436-461, June.
    5. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546, Elsevier.
    6. Chayawadee Chai-anant & Runchana Pongsaparn & Kessarin Tansuwanarat, 2008. "Roles of Exchange Rate in Monetary Policy under Inflation Targeting: A Case Study for Thailand," Working Papers 2008-03, Monetary Policy Group, Bank of Thailand.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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