Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs
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I show that labor market asymmetries are key to generating a quantitatively significant trade-off between inflation and unemployment stabilization in New Keynesian models with search and matching frictions in the labor market. In such an environment, a strong focus on inflation stabilization in response to shocks comes at the cost of larger labor market volatility. Because unemployment fluctuations are asymmetric, it also results in higher average unemployment. The optimal policy responds strongly to both inflation and employment and stabilizes labor market fluctuations. Most of the welfare gains from adopting this policy are accounted for by the increase in average employment relative to the price stability case. When labor market fluctuations are linear, the monetary authority loses its leverage over average unemployment, and a policy of price stability is close to optimal.
Keywords: Matching frictions; Optimal monetary policy; Unemployment Asymmetries (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Asymmetric Unemployment Fluctuations and Monetary Policy Trade-Offs (2020)
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