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Journal article
Ester Faia

Optimal Monetary Policy Rules with Labour Market Frictions

  • Abstract
    This paper studies optimal monetary policy rules in a framework with sticky prices, matching frictions and real wage rigidities. Optimal monetary policy is given by a constrained Ramsey plan in which the monetary authority maximizes the agents’ welfare subject to the competitive economy relations and the assumed monetary policy rule. I find that the optimal policy rule should respond to unemployment alongside with inflation. This is so since models with matching frictions (unlike standard New Keynesian models) feature a congestion externality that makes unemployment inefficiently high. A strong response to inflation remains optimal while a response to output is always welfare detrimental.

  • Keywords

    optimal monetary policy rules, matching frictions, wage rigidity

  • JEL classification

    E52, E24

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