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Search and matching frictions and optimal monetary policy

Thomas, Carlos (2006) Search and matching frictions and optimal monetary policy. CEPDP, 743. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 0753020491

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Identification Number: 743

Abstract

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.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2006 Carlos Thomas
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 21 Jul 2008 15:37
Last Modified: 01 Oct 2010 09:12
URI: http://eprints.lse.ac.uk/id/eprint/19782

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