Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment

By Olivier J. Blanchard, J. Gaĺı. 2010

390 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/911c3ed4f40174fa99e6897d71e4bf868ccc0c8e

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Citations in the corpus

FiMod - a DSGE Model for Fiscal Policy Simulations (2012, background): “Following Galí et al. (2007), we assume that each country is populated by a share (1− μ) of optimizing (or Ricardian) households who have unrestricted access to capital markets and are therefore able to substitute consumption intertemporally.”
CAPITAL DESTRUCTION, JOBLESS RECOVERIES, AND THE DISCIPLINE DEVICE ROLE OF UNEMPLOYMENT (2012, positive): “As in Blanchard and Gali (2010), the cost per hire (Gt) is taken as given by each firm and is increasing with labor market tightness Xt :17 Gt = γ tBXηt , (8) where γ is the deterministic growth rate,18 B is a positive constant, and η ≥ 0 measures the elasticity of hiring costs to labor market…”
Regime dependence of the fiscal multiplier (2012, background): “Yet, it should be noted that recent models include search and matching on the labor market and can improve the volatility of employment, see Blanchard and Gali (2008) and the matching of the employment to data, see Hall (2009).”
The Ins and Outs of UK Unemployment (2011, positive): “Elsby et al. (2008) present a dynamic decomposition of (log) actual unemployment that is applicable to a 'two-state'world in which workers can either be employed or unemployed.”
Inequality and Unemployment in a Global Economy (2009, positive): “…cutoff above which firms export (θx) is determined by the requirement that at this productivity a firm is indifferent between serving only the domestic 18As shown by Blanchard and Galí (2008) and in the web-based technical appendix, this relationship can be derived from a constant returns to…”
A Theory of Countercyclical Government Multiplier (2014, positive): “I redid the simulations with a monetary policy rule that includes an output gap: where _ u is steady-state unemployment, μ π = 5, and μ u = − 0.8. almost to those The values of μ π and μ u are borrowed from Blanchard and Galí ( 2010 ) .”