Insider-Outsider Labor Markets, Hysteresis and Monetary Policy

Jordi Galí

No 27385, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as JORDI GALÍ, 2022. "Insider–Outsider Labor Markets, Hysteresis, and Monetary Policy," Journal of Money, Credit and Banking, vol 54(S1), pages 53-88.

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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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