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Blanchard, Olivier, and
Jordi Galí. 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment."
,
2(2): 1-30.
Show Article Details
DOI: 10.1257/mac.2.2.1
Abstract:We construct a utility-based model of fluctuations with nominal
rigidities and unemployment. We first show that under a standard
utility specification, productivity shocks have no effect on unemployment
in the constrained efficient allocation. That property is also
shown to hold, despite labor market frictions, in the decentralized
equilibrium under flexible prices and wages. Inefficient unemployment
fluctuations arise when we introduce real-wage rigidities. As a
result, in the presence of staggered price setting by firms, the central
bank faces a trade-off between inflation and unemployment stabilization,
which depends on labor market characteristics. We draw the
implications for optimal monetary policy. (JEL E12, E24, E52)
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Authors:
Blanchard, Olivier (MIT)
Galí, Jordi (CREI, U Pompeu Fabra)
JEL Classifications:
E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E52: Monetary Policy
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