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Labor market participation, unemployment and monetary policy

Alessia Campolmi and Stefano Gnocchi

Journal of Monetary Economics, 2016, vol. 79, issue C, 17-29

Abstract: Models of unemployment and monetary policy usually assume constant participation. Incorporating a participation decision into a standard New Keynesian model with matching frictions, we show that market tightness becomes endogenously more volatile because both the opportunity cost of home production and the reservation wage vary with participation. The model can simultaneously explain the low volatility of participation, the high volatility of unemployment, and a procyclical workers׳ outside option of working. A policy of strict inflation targeting is close to optimal, and increasing the response of the interest rate to inflation does not have a large impact on the volatility of unemployment because of the endogenous response of participation.

Keywords: Matching frictions; Endogenous participation; Monetary policy (search for similar items in EconPapers)
Date: 2016
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Working Paper: Labor Market Participation, Unemployment and Monetary Policy (2014) Downloads
Working Paper: Labor Market Participation, Unemployment and Monetary Policy (2011) Downloads
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DOI: 10.1016/j.jmoneco.2016.03.001

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