Ramsey Monetary Policy With Labour Market Frictions

By Ester Faia. Social Science Research Network, 2009

155 citations recorded by the source corpus.

Traditional New Keynesian models prescribe that optimal monetary policy should aim at price stability. In the absence of a labor market frictions, the monetary authority faces no unemployment/inflation trade-off. The design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market. Optimal policy features deviations from price stability in response to both productivity and government expenditure shocks. When the Hosios [1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279-298] condition is not met, search externalities make the flexible price allocation unfeasible. Optimal deviations from price stability increase with workers' bargaining power, as firms incentives to post vacancies fall and unemployment fluctuates above the Pareto efficient one.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/0f626841cfd0247dde935ad1637960a478a79bba

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Citations in the corpus

CAPITAL DESTRUCTION, JOBLESS RECOVERIES, AND THE DISCIPLINE DEVICE ROLE OF UNEMPLOYMENT (2012, unknown): “In order to eliminate S t+1 in equation (14), V U t can be written as: V U t = βEt { Ct Ct+1 [ (1−Xt+1)V U t+1 +Xt+1V N t+1 ]} (16)”
Capital regulation and monetary policy with fragile banks (2013, background): “The first group is a See for instance Kim and Kim [40], Schmitt-Grohe and Uribe [52], [53], [54], Faia and Monacelli [32], Faia [29], Faia [30].”
Search and matching frictions and optimal monetary policy (2008, background): “I can then express (2) as S it = Wit Pt w ̄ t + (1 )Et t;t+1S it+1; (20)”