Uninsured Unemployment Risk and Optimal Monetary Policy

Edouard Challe

No 2017-54, Working Papers from Center for Research in Economics and Statistics

Abstract: I study optimal monetary policy in a New Keynesian economy wherein households precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feedback to greater unemployment risk. I show this de?flationary feedback loop to be constrained-inefficient and to call for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept signifi?cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy effectively breaks the defl?ationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark.

Keywords: Unemployment risk; imperfect insurance; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-11-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ias, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://crest.science/RePEc/wpstorage/2017-54.pdf CREST working paper version (application/pdf)

Related works:
Working Paper: Uninsured Unemployment Risk and Optimal Monetary Policy (2018)
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:crs:wpaper:2017-54

Access Statistics for this paper

More papers in Working Papers from Center for Research in Economics and Statistics Contact information at EDIRC.
Bibliographic data for series maintained by Secretariat General () and Murielle Jules Maintainer-Email : murielle.jules@ensae.Fr.