Unemployment fluctuations, and optimal monetary policy in a small open economy

Hyuk-jae Rhee and Jeongseok Song ()
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Jeongseok Song: Department of Economics,Chung-Ang University

No 1309, Working Papers from University of Windsor, Department of Economics

Abstract: In this paper, we incorporate key ingredients of a small open economy into the New Keynesian model with unemployment of Gali (2011a,b) to discuss the design of the monetary policy. The main findings regarding the issue of monetary policy design can be summarized as threefold. First, the optimal policy is to seek to minimize variance of domestic price inflation, wage inflation, and the output gap if both domestic price and wage are sticky. Second, stabilizing unemployment rate is important to reduce the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Last, controlling CPI inflation is the best when the policy is not allowed to respond to unemployment rate.

Keywords: Unemployment; Monetary policy; Small open economy. (search for similar items in EconPapers)
JEL-codes: E31 E58 F41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-08-28
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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