Search and matching functions and optimal monetary policy
By: Carlos Thomas.
Contributors: London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper -- no. 743
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2006
Place of publication: London
Language: eng
Format: Electronic resource
Other titles: Equilibrium unemployment and optimal monetary policy
Description: I analyze optimal monetary policy in an economy with search and matching frictions in the labor market and staggered nominal wage and price contracts. In this framework, as opposed to the standard New Keynesian model, preset nominal wages need not have any effect on existing employment relationships. However, staggered bargaining of nominal wages distorts aggregate job creation and creates inefficient dispersion in hiring rates across firms. Targeting zero inflation (the optimal policy in the standard New Keynesian model) only magnifies these distortions. The optimal policy allows for non-zero inflation in response to real shocks, so as to reduce the rigidity of real wages. Quantitatively, the case against price stability as the sole goal of monetary policy turns out to be important.
Notes: Title from publisher's abstract page (viewed on Jan. 5, 2007).

"December 2006."

Revised version previously issued in August 2006 as: Equilibrium unemployment and optimal monetary policy.

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.