Supply Shocks, Employment Gap, and Monetary Policy

Takushi Kurozumi and Willem Van Zandweghe
Additional contact information
Willem Van Zandweghe: Federal Reserve Bank of Cleveland

No 25-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: How should monetary policy respond to supply shocks in terms of inflation and employment stabilization? We introduce labor force entry and exit in an otherwise standard model with staggered price- and wage-setting to include employment in the model. A welfare-maximizing policy features wage growth stabilization with variation in the employment gap and inflation. Under staggered price- and wage-setting, the real wage adjustments to shocks entail a welfare cost, and variation in the employment gap contributes to reducing the welfare cost. Therefore, leaning against the employment gap induces substantial welfare losses for supply shocks compared to the welfare-maximizing policy.

Keywords: Labor force entry and exit; Extensive margin of labor; Staggered price- and wage-setting; Wage growth stabilization (search for similar items in EconPapers)
JEL-codes: E24 E31 E52 J21 (search for similar items in EconPapers)
Date: 2025-03-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.boj.or.jp/en/research/wps_rev/wps_2025/data/wp25e04.pdf (application/pdf)

Related works:
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:boj:bojwps:wp25e04

Access Statistics for this paper

More papers in Bank of Japan Working Paper Series from Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Bank of Japan ().