Policy biases in a model with labor market frictions

Richard Dennis and Tatiana Kirsanova

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We develop a model with labor-market matching frictions that is subject to a range of shocks, including shocks to matching efficiency and bargaining power, and use the model to examine how monetary policy should respond to such shocks. We show that optimal monetary policy is highly efficient at responding to these labor market shocks, producing outcomes that are close to the flex-price equilibrium. Moreover, this efficiency remains if monetary policy is conducted with discretion, indicating that time-inconsistency and forward-guidance are not central to the policy response. We also show that several popular simple rules are also effective at responding to these labor market shocks.

Keywords: Labor market frictions; matching; optimal policy (search for similar items in EconPapers)
JEL-codes: C62 C73 E52 E61 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2021-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2021-63

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