Working Paper: NBER ID: w13897
Authors: Olivier Blanchard; Jordi Gali
Abstract: 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.
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.
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.
Keywords: Labor Markets; Monetary Policy; New-Keynesian Model; Unemployment; Inflation
JEL Codes: E3; E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity shocks (X) (O49) | Unemployment (U) (J64) |
| productivity shocks (X) (O49) | Unemployment fluctuations (U) (J64) |
| labor market characteristics (F) (J29) | inflation (I) and Unemployment (U) (E31) |
| monetary policy (M) (E50) | inflation (I) (E31) |
| monetary policy (M) (E50) | Unemployment (U) (J64) |
| productivity shocks (X) (O49) | inflation (I) (E31) |