Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment / Olivier Blanchard, Jordi Gali.

Format:

Book

Author/Creator:

Blanchard, Olivier.

Contributor:

National Bureau of Economic Research.

Gali, Jordi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13897.

NBER working paper series no. w13897

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Labor Markets and Monetary Policy

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation tradeoff and for the conduct of monetary policy.<br><br>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 unemployment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment.<br><br>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.

Notes:

Print version record

March 2008.