TY  - JOUR
AU  - Blanchard,Olivier
AU  - Gali,Jordi
TI  - Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13897
PY  - 2008
Y2  - March 2008
UR  - http://www.nber.org/papers/w13897
L1  - http://www.nber.org/papers/w13897.pdf
N1  - Author contact info:
Olivier J. Blanchard
MIT
Department of Economics
E52-357
Cambridge, MA  02142-1347
Tel: 617/253-8891
Fax: 617/253-4096
E-Mail: blanchar@mit.edu

Jordi Gali
Centre de Recerca en Economia Internacional (CREI)
Ramon Trias Fargas 25
08005 Barcelona  SPAIN
Tel: 011-34-93-5422754
Fax: 011-34-93-5421860
E-Mail: jgali@crei.cat
AB  - 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.<br><br>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.<br><br>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.
ER  -