Monetary policy and labor market frictions: A tax interpretation

► The interactions of nominal rigidities and labor market frictions are investigated. ► Tax instruments can implement the first best equilibrium in this environment. ► Monetary authorities face trade-offs when these tax instruments are unavailable. ► Large labor inefficiencies may call for only small deviations from price stability. ► Gains from deviating from price stability are larger with more volatile labor flows.