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Three Unemployment Rates Relevant To Monetary Policy

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  • Croitoru, Lucian

    (The National Bank of Romania, the Romanian Centre for Economic Policies, the International Business and Economics Faculty, Academy of Economic Studies)

Abstract

We construct a Neo-Keynesian model, with a standard utility specification and nominal rigidities, in which monopolistic firms have employment-related norms and the wage bargaining power is variable. Due to norms, firms hire workers in excess of the number of employees required by technology. Workers in excess are efficiency reserves of the firms. We present the implications for the unemployment-inflation trade-off. We show that, with norms and variable bargaining power, besides the natural rate of unemployment, the unemployment rate at which firms establish/cancel norms, and the one at which the labor bargaining power reach maximum are relevant to decision making We show that, in the presence of norms, the response of the unemployment rate to a change in the monetary policy stance is relatively large, and temporarily concomitant increases in the unemployment rate and inflation can occur.

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Bibliographic Info

Article provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.

Volume (Year): (2011)
Issue (Month): 3 (September)
Pages: 213-238

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Handle: RePEc:rjr:romjef:v::y:2011:i:3:p:213-238

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  1. Blanchard, Olivier J & Galí, Jordi, 2008. "Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment," CEPR Discussion Papers 6765, C.E.P.R. Discussion Papers.
  2. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
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  8. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
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  13. Acemoglu, Daron, 1995. "Asymmetric Information, Bargaining, and Unemployment Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 1003-24, November.
  14. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
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  17. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
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