Labor market frictions and optimal monetary policy
We study the properties of optimal monetary policy in an environment of nominal wage rigidity and unemployment. We show that nominal wage rigidity increases the sacrifce ratio, and therefore reduces the efectiveness of sacrifcing employment in order to stabilize infation. It follows that in response to higher nominal wage rigidity, it is optimal to allow for smaller fuctuations of unemployment at the expense of larger infation fuctuations.
JEL classifcation: E24; E32; E52; J64
Keywords: Search; Matching; Business cycles; Monetary policy