Wage rigidities and unemployment fluctuations in a small open economy

Hyuk Jae Rhee and Jeongseok Song

Economic Modelling, 2020, vol. 88, issue C, 244-262

Abstract: This study analyzes the implications of the monetary policy for the unemployment rate in a small open economy. We introduce nominal wage rigidities and unemployment into the small open economy version of the dynamic stochastic general equilibrium model. We derive three main findings. First, under nominal wage rigidities, the cyclical properties of the calibrated model, in response to a productivity shock, are consistent with the empirical evidence on a decrease in employment and an increase in real wages. Second, for all the variables considered, the Taylor rule tracks the optimal policy better than the simple rule with unemployment as an argument. Third, regardless of the output or unemployment gap being targeted, it is not optimal that central banks respond to nominal exchange rate variations.

Keywords: Wage rigidities; Unemployment; Taylor rule (search for similar items in EconPapers)
JEL-codes: E31 E58 F41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:88:y:2020:i:c:p:244-262

DOI: 10.1016/j.econmod.2019.09.033

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