Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment
We construct a utility-based model of fluctuations with nominal rigidities and unemployment. We first show that under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. That property is also shown to hold, despite labor marke...
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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American Economic Association
2012
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| Online Access: | http://hdl.handle.net/1721.1/71906 https://orcid.org/0000-0001-8142-5016 |
| _version_ | 1826204947935395840 |
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| author | Blanchard, Olivier Jean Gali, Jordi |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Blanchard, Olivier Jean Gali, Jordi |
| author_sort | Blanchard, Olivier Jean |
| collection | MIT |
| description | We construct a utility-based model of fluctuations with nominal rigidities and unemployment. We first show that under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. That property is also shown to hold, despite labor market frictions, in the decentralized equilibrium under flexible prices and wages. Inefficient unemployment fluctuations arise when we introduce real-wage rigidities. As a result, in the presence of staggered price setting by firms, the central bank faces a trade-off between inflation and unemployment stabilization, which depends on labor market characteristics. We draw the implications for optimal monetary policy. |
| first_indexed | 2024-09-23T13:03:35Z |
| format | Article |
| id | mit-1721.1/71906 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T13:03:35Z |
| publishDate | 2012 |
| publisher | American Economic Association |
| record_format | dspace |
| spelling | mit-1721.1/719062022-10-01T12:50:00Z Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment Blanchard, Olivier Jean Gali, Jordi Massachusetts Institute of Technology. Department of Economics Blanchard, Olivier Jean Blanchard, Olivier Jean We construct a utility-based model of fluctuations with nominal rigidities and unemployment. We first show that under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. That property is also shown to hold, despite labor market frictions, in the decentralized equilibrium under flexible prices and wages. Inefficient unemployment fluctuations arise when we introduce real-wage rigidities. As a result, in the presence of staggered price setting by firms, the central bank faces a trade-off between inflation and unemployment stabilization, which depends on labor market characteristics. We draw the implications for optimal monetary policy. National Science Foundation (U.S.) (SES 0617744) 2012-07-31T12:55:16Z 2012-07-31T12:55:16Z 2010-04 Article http://purl.org/eprint/type/JournalArticle 1945-7715 http://hdl.handle.net/1721.1/71906 Blanchard, Olivier, and Jordi Galí. 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment." American Economic Journal: Macroeconomics, 2(2): 1–30. Copyright 2010 American Economic Association. https://orcid.org/0000-0001-8142-5016 en_US http://dx.doi.org/10.1257/mac.2.2.1 American Economic Journal: Macroeconomics Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf American Economic Association American Economic Association |
| spellingShingle | Blanchard, Olivier Jean Gali, Jordi Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment |
| title | Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment |
| title_full | Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment |
| title_fullStr | Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment |
| title_full_unstemmed | Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment |
| title_short | Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment |
| title_sort | labor markets and monetary policy a new keynesian model with unemployment |
| url | http://hdl.handle.net/1721.1/71906 https://orcid.org/0000-0001-8142-5016 |
| work_keys_str_mv | AT blanchardolivierjean labormarketsandmonetarypolicyanewkeynesianmodelwithunemployment AT galijordi labormarketsandmonetarypolicyanewkeynesianmodelwithunemployment |