Working Paper: CEPR ID: DP6826
Authors: Luca Sala; Ulf Sderström; Antonella Trigari
Abstract: We study the design of monetary policy in an estimated model with sticky prices, search and matching frictions, and staggered nominal wage bargaining. We find that the estimated natural rate of unemployment is consistent with the NBER description of the U.S. business cycle, and that the inflation/unemployment trade-off facing monetary policymakers is quantitatively important. We also show that parameter uncertainty has a limited effect on the performance or design of monetary policy, while natural rate uncertainty has more sizeable effects. Nevertheless, policy rules that respond to the output or unemployment gaps are more efficient than rules responding to output or unemployment growth rates, also in the presence of uncertainty about the natural rates.
Keywords: Labour Market; Search; Monetary Policy; Natural Rate Uncertainty; Parameter Uncertainty; Unemployment
JEL Codes: E24; E32; E52; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market frictions (J29) | natural rate of unemployment (J64) |
| inflation (E31) | unemployment levels (J64) |
| parameter uncertainty (C51) | monetary policy performance (E52) |
| natural rate uncertainty (D89) | monetary policy performance (E52) |
| choice of policy rule (E61) | economic outcomes (F61) |