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Insider-Outsider Labor Markets, Hysteresis and Monetary Policy

Jordi Galí
Authors registered in the RePEc Author Service: Giacomo A. M. Ponzetto ()

No 872, Working Papers from Barcelona Graduate School of Economics

Abstract: I develop a version of the New Keynesian model with insider-outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on unemployment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. A simple interest rule that includes the unemployment rate is shown to approximate well the optimal policy.

Keywords: wage stickiness; New Keynesian model; unemployment fluctuations; Phillips curve; monetary policy tradeoffs (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-tre
Date: 2016-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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