Labour Markets, Liquidity, and Monetary Policy Regimes

29 Pages Posted: 9 Jun 2004

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Scott Hendry

Bank of Canada

Kevin Moran

Bank of Canada - Department of Monetary and Financial Analysis

Abstract

We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the labour market. The information friction increases the persistence in the response of interest rates following monetary policy regime shifts. This occurs because agents have incomplete information about the nature of the shifts and optimally update their inflation forecasts using an "adaptive" expectations rule. The search friction transmits the interest rate movements to the labour market by affecting job creation activities; together, the two frictions imply that unemployment reacts very gradually to monetary policy shocks.

JEL Classification: E4, E5

Suggested Citation

Andolfatto, David and Hendry, Scott and Moran, Kevin, Labour Markets, Liquidity, and Monetary Policy Regimes. Canadian Journal of Economics, Vol. 37, No. 2, pp. 392-420, May 2004. Available at SSRN: https://ssrn.com/abstract=531748

David Andolfatto

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604 291-5825 (Phone)
604 291-5944 (Fax)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Scott Hendry

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-7668 (Phone)

Kevin Moran (Contact Author)

Bank of Canada - Department of Monetary and Financial Analysis ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-7631 (Phone)
613-782-7508 (Fax)

HOME PAGE: http://www.bankofcanada.ca/kmoran/

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