Labor markets and monetary policy: A new-Keynesian model with unemployement

Olivier Blanchard and Jordi Galí

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation trade- off and for the conduct of monetary policy. We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in un- employment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.

Keywords: New-Keynesian model; labor market frictions; search model; unemployment; sticky prices; real wage rigidities (search for similar items in EconPapers)
JEL-codes: E32 E50 (search for similar items in EconPapers)
Date: 2006-03, Revised 2008-03
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
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Citations: View citations in EconPapers (57)

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Related works:
Journal Article: Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment (2010)
Working Paper: Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment (2008)
Working Paper: Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1076

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