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Labor Market Frictions, Indeterminacy, and Interest Rate Rules
- Journal of Money, Credit, and Banking
- The Ohio State University Press
- Volume 38, Number 7, October 2006
- pp. 1959-1970
- 10.1353/mcb.2006.0098
- Article
- Additional Information
This paper studies the emergence of indeterminate equilibria in a standard New Keynesian model characterized by labor market frictions, under a policy rule that reacts strictly to inflation. Given labor market frictions, monetary policy may not be able to prevent aggregate fluctuations from being driven solely by self-fulfilling expectations. This is not, though, a result that holds under all circumstances: a monetary policy that reacts to some average measures of inflation or to the output gap may guarantee determinacy in the economy.