Labour markets, liquidity, and monetary policy regimes

David Andolfatto (), Scott Hendry and Kevin Moran

Canadian Journal of Economics, 2004, vol. 37, issue 2, 392-420

Abstract: We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the labour market. The information friction increases the persistence in the response of interest rates following monetary policy regime shifts. This occurs because agents have incomplete information about the nature of the shifts and optimally update their inflation forecasts using an `adaptive' expectations rule. The search friction transmits the interest rate movements to the labour market by affecting job creation activities; together, the two frictions imply that unemployment reacts very gradually to monetary policy shocks.

JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (9)

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Journal Article: Labour markets, liquidity, and monetary policy regimes (2004)
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