Labor Market Frictions, Indeterminacy, and Interest Rate Rules

Francesco Zanetti

Journal of Money, Credit and Banking, 2006, vol. 38, issue 7, 1959-1970

Abstract: This paper studies the emergence of indeterminate equilibria in a standard New Keynesian model characterized by labor market frictions, under a policy rule that reacts strictly to inflation. Given labor market frictions, monetary policy may not be able to prevent aggregate fluctuations from being driven solely by self-fulfilling expectations. This is not, though, a result that holds under all circumstances: a monetary policy that reacts to some average measures of inflation or to the output gap may guarantee determinacy in the economy.

Date: 2006
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