Insider-Outsider Labor Markets, Hysteresis and Monetary Policy

Galí, Jordi
Authors registered in the RePEc Author Service: Jordi Galí

No 14886, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (un)employment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. Two simple targetiing rules are shown to approximate well the optimal policy. The properties of the model and effects of different policies are analyzed through the lens of the labor wedge and its components.

Keywords: Wage stickiness; New keynesian model; Unemployment fluctuations; Wage phillips curve; Monetary policy tradeoffs (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Working Paper: Insider-Outsider Labor Markets, Hysteresis and Monetary Policy (2020)
Working Paper: Insider-Outsider Labor Markets, Hysteresis and Monetary Policy (2016)
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