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 effect on existing employment relationships. However, staggered bargaining of nominal wages distorts aggregate job creation and creates inefficient dispersion in hiring rates across firms. Targeting zero inflation (the optimal policy in the standard New Keynesian model) only magnifies these distortions. The optimal policy allows for non-zero inflation in response to real shocks, so as to reduce the rigidity of real wages. Quantitatively, the case against price stability as the sole goal of monetary policy turns out to be important.

Abstract:This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existing models of this type, our model incorporates a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. We also provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. Finally, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures.In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment.Keywords: General Equilibrium, Fiscal Policy Simulations, Labor Market Search JEL codes: E24, E32, E62, H20, H50 Non-technical summaryThe recent crisis has obliged governments around the world to put in place ambitious fiscal stimulus plans and the ensuing fiscal consolidation (or "exit") strategies in order to assure fiscal stability. The latter issue is moving center stage in current public debates. In order to bring fiscal balances back on track, fiscal authorities mainly have the possibility of increasing taxes and/or cutting public spending.But which taxes should be increased? Which spending components should be cut?All across Europe, countries such as Germany, Greece, Portugal, Spain and others have put forward consolidation plans that include cuts in public employment, public wages and public investment as well as increases in VAT and labor income tax rates. Which consequences can we expect from these measures on, among others, the spillover effects of fiscal actions in one country to the other. Second, we provide a notable degree of disaggregation on the fiscal expenditures side. In particular, we explicitly distinguish between public investment and public consumption; the latter in turn is divided between public purchases and the public sector wage bill. Each of these components has a distinct effect on the rest of the economy.The model thus allows simulating specific measures that have been implemented recently in a number of European countries, such as cuts in public sector wages and/or employment, and reductions in public investment. Fiscal expenditures are completed with a number of transfers to the private sector, including unemployment benefits and lump-sum subsidies. On the fiscal revenues side, the model considers also a wide range of taxes, including taxes on consumption, labor income, returns on bond holdings and on physical capital, and socia...

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This paper assesses the impact of oil price changes on Spanish and euro area consumer price infl ation. We fi nd, consistently with recent international evidence, that the infl ationary effect of oil price changes is limited, even though crude oil price fl uctuations are a major driver of infl ation variability. The impact on Spanish infl ation is found to be somewhat higher than in the euro area. Direct effects are increasing over time, refl ecting the higher spending of households on refi ned oil products, whereas indirect ones, defi ned in broad terms, are losing importance.

We analyze optimal monetary policy in a model with two distinct …nancial frictions. First, borrowing is subject to collateral constraints. Second, credit ‡ows are intermediated by monopolistically competitive banks, thus giving rise to endogenous lending spreads. We show that, up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: in ‡ation, output gap, the consumption gap between constrained and unconstrained agents, and the distribution of the collateralizable asset between both groups. Following both productivity and …nancial shocks, the optimal monetary policy commitment implies a short-run trade-o¤ between stabilization goals. Such policy trade-o¤s become ampli…ed as banking competition increases, due to the fall in lending spreads and the resulting increase in …nancial leveraging.