Learning about monetary policy rules when labor market search and matching frictions matter

Takushi Kurozumi and Willem Van Zandweghe

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 4, 523-535

Abstract: This paper examines the implications of labor market search and matching frictions for determinacy and E-stability of rational expectations equilibrium (REE) in a sticky price model with interest rate policy. When labor adjustment takes place solely at the extensive margin, forecast-based policy that meets the Taylor principle is likely to induce indeterminacy and E-instability, regardless of whether it is strictly or flexibly inflation targeting. When labor adjustment takes place at both the extensive and intensive margins, the strictly inflation-forecast targeting policy remains likely to induce indeterminacy, but it generates a unique E-stable fundamental REE as long as the Taylor principle is satisfied. Therefore, the presence of search and matching frictions changes the determinacy properties of a strictly inflation-forecast targeting policy, and alters its E-stability properties when only an extensive margin is present but not when labor adjustment takes place at both margins.

Keywords: Labor market search and matching frictions; Forecast-based interest rate policy; Indeterminacy; E-stability; Extensive and intensive margins of labor (search for similar items in EconPapers)
JEL-codes: E24 E52 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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Working Paper: Learning about monetary policy rules when labor market search and matching frictions matter (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:4:p:523-535

DOI: 10.1016/j.jedc.2011.10.003

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