NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Olivier Blanchard, Jordi Gali

NBER Working Paper No. 13897
Issued in March 2008
NBER Program(s):   EFG

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.

download in pdf format
   (358 K)

email paper

This paper is available as PDF (358 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13897

Published: Olivier Blanchard & Jordi Gali, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April. citation courtesy of

Users who downloaded this paper also downloaded these:
Blanchard and Gali w11806 Real Wage Rigidities and the New Keynesian Model
Gali and Gertler w13542 Macroeconomic Modeling for Monetary Policy Evaluation
Gali w15758 The Return of the Wage Phillips Curve
Blanchard w14259 The State of Macro
Gali w15871 Monetary Policy and Unemployment
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us