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Optimal Monetary Policy with Missing Markets

Authors: Canning, David;

Optimal Monetary Policy with Missing Markets

Abstract

In real business cycle models with spot markets, agents respond optimally to fluctuations by varying their labor supply. While this is individually optimal, the employment volatility that results is efficient; the inefficiency is due to the lack of forward markets for labor and the consequent inability of the young to insure against future shocks. A real business cycle model is constructed in which an active monetary policy, accommodating past price shocks to prevent the expectation of price reversion, Pareto-dominates a stable moeny stock by stabilizing employment over the cycle. Stable employment approximates the outcome with complete insurance markets; the young would like to sell a fixed volume of labor forward, allowing less risk-averse agents to bear the volatility in the spot labor market. These results undermine the use of the "full information" competitive equilibrium as a benchmark for policy analysis in spot market models. Copyright 1989 by The London School of Economics and Political Science.

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
0
Average
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