A new Keynesian model with unemployment

  • We develop a utility based model of fluctuations, with nominal rigidities, and unemployment. In doing so, we combine two strands of research: the New Keynesian model with its focus on nominal rigidities, and the Diamond-Mortensen-Pissarides model, with its focus on labor market frictions and unemployment. In developing this model, 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 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 real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and we draw the implications for optimal monetary policy. JEL Classification: E32, E50

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Author:Olivier Blanchard, Jordi Galí
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2007,08
Series (Serial Number):CFS working paper series (2007, 08)
Document Type:Working Paper
Year of Completion:2007
Year of first Publication:2007
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2007/02/23
Tag:Labor Market Frictions; New Keynesian Model; Real Wage Rigidities; Search Model; Sticky Prices; Unemployment
GND Keyword:Neokeynesianismus; Arbeitsmarkt; Friktionelle Arbeitslosigkeit
Issue:Version July 18, 2006
Page Number:46
Version Juli 18, 2006
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht