Search and matching frictions and optimal monetary policy JOB MARKET PAPER

I analyze optimal monetary policy in an economy with search and matching frictions in the labor market and staggered nominal wage and price contracts. In this framework, as opposed to the standard New Keynesian model, preset nominal wages need not have any e¤ect on existing employment relationships. However, staggered bargaining of nominal wages distorts aggregate job cre-ation and creates ine ¢ cient dispersion in hiring rates across \u85rms. Targeting zero ination (the optimal policy in the standard New Keynesian model) only magni es these distortions. The optimal policy allows for non-zero ination in response to real shocks, so as to reduce the rigidity of real wages. Quantita-tively, the case against price stability as the sole goal of monetary policy turns out to be important