Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment

Olivier Blanchard and Jordi Galí

American Economic Journal: Macroeconomics, 2010, vol. 2, issue 2, 1-30

Abstract: 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. (JEL E12, E24, E52)

JEL-codes: E12 E24 E52 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mac.2.2.1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (647)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.2.1 (application/pdf)
http://www.aeaweb.org/aej/mac/data/2009-0108_data.zip (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment (2008)
Working Paper: Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:2:y:2010:i:2:p:1-30

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().