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Optimal Monetary Policy with Imperfect Unemployment Insurance

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NAKAJIMA Tomoyuki

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Abstract

We consider an efficiency-wage model with the Calvo-type sticky prices and analyze the optimal monetary policy when the unemployment insurance is not perfect. With imperfect risk sharing, the strict zero-inflation policy is no longer optimal even when the steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earnings loss due to unemployment varies over business cycles. If the idiosyncratic income loss is acyclical, the optimal policy differs very little from the zero-inflation policy. However, if it varies countercyclically, as evidence suggests, the deviation of the optimal policy from the complete price-level stabilization becomes quantitatively signifficant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 09014.

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Length: 41 pages
Date of creation: Apr 2009
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Handle: RePEc:eti:dpaper:09014

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  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
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  9. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January. [Downloadable!] (restricted)
  10. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September. [Downloadable!] (restricted)
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  11. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 825-860, October. [Downloadable!] (restricted)
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  12. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version," NBER Working Papers 11417, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. P. Benigno & M. Woodford, 2003. "Optimal monetary and fiscal policy: a linear-quadratic approach," Proceedings, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  15. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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  16. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc. [Downloadable!]
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  17. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March. [Downloadable!] (restricted)
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  1. Gregory Erin Givens, 2007. "Unemployment, Imperfect Risk Sharing, and the Monetary Business Cycle," Working Papers 200710, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
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