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Monetary Policy Rules in a Search Model of the Labor Market

  • Alvaro J. Riascos

    ()

This paper studies the performance, in terms of volatility and welfare, of different monetary policy rules in an economy with two market frictions. We consider a financial friction that highlights the credit channel as the monetary transmission mechanism and a labor friction, that considerably amplifies the effects of monetary policy. We first document some empirical facts including, the strong relation between prices and inflation with the main measures of labor supply (i.e. a short run Phillips Curve) and the short run expansionary effects of monetary policy. We then build a model roughly consistent with these facts. We use our model to study output and inflation volatility under different monetary policy rules, when the economy is subject to productivity and/or government spending shocks. We consider some of the rules widely discussed in the literature (i.e. Taylor Rules). In terms of output and inflation volatility, our results call for pure inflation targeting and/or interest rate smoothing when the economy is subject to productivity shocks. In terms of welfare, differences are negligible under the different policy rules considered

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 003250.

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Length: 39
Date of creation: 31 Oct 2002
Date of revision:
Handle: RePEc:col:000094:003250
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  1. Chéron, A. & Langot, François, 1999. "The Phillips and Beveridge curves revisited," CEPREMAP Working Papers (Couverture Orange) 9905, CEPREMAP.
  2. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
  4. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  5. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  6. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper 9902, Federal Reserve Bank of Cleveland.
  7. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  8. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  9. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  10. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  11. Blanchard, J.O., 1989. "The Aggregate Matching Function," Working papers 538, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  13. Álvaro Riascos, 2002. "Dynamic response to monetary shocks in a search model of the labor market," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  14. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
  15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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