Optimal Monetary Policy Rules with Labor Market Frictions

By Ester Faia. Social Science Research Network, 2008

182 citations recorded by the source corpus.

This paper studies optimal monetary policy rules in a framework with sticky prices, matching frictions and real wage rigidities. Optimal policy is given by a constrained Ramsey plan in which the monetary authority maximizes the agents' welfare subject to the competitive economy relations and the assumed monetary policy rule. I find that the optimal rule should respond to unemployment alongside with inflation. This is so since models with matching frictions (unlike standard new Keynesian models) feature a congestion externality that makes unemployment inefficiently high. A strong response to inflation remains optimal while a response to output is always welfare detrimental.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a11cbf075cccc535b17c7a5a8c6fc2275b14ac35

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Citations in the corpus

Ramsey Monetary Policy With Labour Market Frictions (2009, background): “7 See also Khan, King and Wolman 2003, Schmitt-Grohe and Uribe 2004b and Faia 2008a .”
Vacancies, Unemployment, and the Phillips Curve (2007, methodology): “(18) Finally, using the demand for nal good j in (15), the aggregate resource constraint is Z Yt(j)dj = Z Y w t (j)dj = Zt Z Nt(j)dj = ZtNt”
A Tale of Two Policies- Prudential Regulation and Monetary Policy with Fragile Banks (2009, background): “See ofr instance Kim and Kim 2003, Kollmann [24], [25] Schmitt-Grohe and Uribe [30], [31], [32], Faia and Monacelli [17], Faia [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].”
Monetary policy and risk taking (2015, methodology): “We set  set equal to 3, chosen in such a way to generate a steady-state level of employment See ofr instance Kim and Kim 2003, Kollmann [?], [?] Schmitt-Grohe and Uribe [38], [39], [40], Faia and Monacelli [24], Faia [23].”