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/lp/american-economic-association/labor-markets-and-monetary-policy-a-new-keynesian-model-with-0DFpUVNg8w
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- Publisher
- American Economic Association
- Copyright
- Copyright © 2010 by the American Economic Association
- Subject
- Articles
- ISSN
- 1945-7715
- eISSN
- 1945-7715
- DOI
- 10.1257/mac.2.2.1
- Publisher site
- See Article on Publisher Site
Abstract
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 )
Journal
American Economic Journal: Macroeconomics – American Economic Association
Published: Apr 1, 2010