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Labor market search, the Taylor principle, and indeterminacy

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  • Kurozumi, Takushi
  • Zandweghe, Willem Van

Abstract

In a sticky-price model with labor market search and matching frictions, forecast-based interestrate policy almost always induces indeterminacy when it is strictly inflation targeting and satisfies the Taylor principle. Indeterminacy is due to a vacancy channel of monetary policy that makes inflation expectations self-fulfilling. The effect of this channel strengthens as the sluggishness of the adjustment of employment relative to that of consumption increases. When this relative sluggishness is high, the Taylor principle fails to ensure determinacy, regardless of whether the policy is forecast-based or outcome-based, whether it is strictly or flexibly inflation targeting, or contains policy rate smoothing.

Suggested Citation

  • Kurozumi, Takushi & Zandweghe, Willem Van, 2010. "Labor market search, the Taylor principle, and indeterminacy," Research Working Paper RWP 11-01, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp11-01
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    References listed on IDEAS

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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
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    Citations

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    Cited by:

    1. Takushi Kurozumi & Willem Van Zandweghe, 2011. "Determinacy under Inflation Targeting Interest Rate Policy in a Sticky Price Model with Investment (and Labor Bargaining)," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(5), pages 1019-1033, August.
    2. repec:wly:japmet:v:31:y:2016:i:7:p:1197-1214 is not listed on IDEAS
    3. Francesco Furlanetto & Nicolas Groshenny, "undated". "Mismatch Shocks and Unemployment During the Great Recession," School of Economics Working Papers 2015-14, University of Adelaide, School of Economics.
    4. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper 2012/07, Norges Bank.
    5. Furlanetto, Francesco & Groshenny, Nicolas, 2016. "Reallocation shocks, persistence and nominal rigidities," Economics Letters, Elsevier, vol. 141(C), pages 151-155.
    6. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    7. Hibiki Ichiue & Takushi Kurozumi & Takeki Sunakawa, 2013. "Inflation Dynamics And Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach For Japan'S Economy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 273-287, January.
    8. Giray Gozgor, 2013. "The New Keynesian Phillips Curve in an Inflation Targeting Country: The Case of Turkey," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 6(1), pages 7-18, April.
    9. Kurozumi, Takushi & Van Zandweghe, Willem, 2012. "Learning about monetary policy rules when labor market search and matching frictions matter," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 523-535.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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