Kiel Working Papers, Kiel Institute for World Economics
No 1823:
Optimal Monetary Policy in Response to Shifts in the Beveridge Curve
Mariya Mileva
Abstract: I build a dynamic stochastic general equilibrium model
with search and matching frictions in the labor market and analyze the
optimal monetary policy response to an outward shift in the Beveridge
curve. The results cover several cases depending on the reason for the
shift. If the shift is due to a fall in the efficiency of matching, then
the optimal response of the central bank is to stabilize inflation. On the
other hand, if the shift arises from an increase in the elasticity of
employment matches with respect to vacancies, then the policy maker faces a
trade off between stabilizing inflation and unemployment. The optimal
policy response to the efficient labor market shock changes when real wages
are sticky but remains unchanged when home and market goods are imperfect
substitutes, compared to the case when they are not. When contrasted to a
Taylor rule that targets inflation and output growth, the optimal monetary
policy is more aggressive in pursuit of its objectives
Keywords: Beveridge curve; Optimal monetary policy; Labor market; Search and matching; (follow links to similar papers)
JEL-Codes: E24,; E32,; E52,; J68; (follow links to similar papers)
30 pages, March 2013
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