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Optimal monetary policy with imperfect unemployment insurance

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Author Info
Tomoyuki Nakajima () (Kyoto University)

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Abstract

We consider an efficiency-wage model with the Calvo-type sticky prices and analyze optimal monetary policy when unemployment insurance is not perfect. With imperfect risk sharing, strict zero-inflation policy is no longer optimal even if the zero-inflation steady-state equilibrium is assumed to be (conditionally) efficient. Quantitative result depends on how idiosyncratic earning losses, measured by the (inverse of the) relative income of the unemployed to the employed, vary over business cycles. If idiosyncratic income losses are acyclical, optimal policy differs very little from the zero-inflation policy. However, if they vary countercyclically, as evidence suggests, the deviation of optimal policy from complete price stabilization becomes quantitatively significant. Furthermore, optimal policy in such a case involves stabilization of output to a much larger extent

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 231.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:231

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Related research
Keywords: optimal monetary policy; efficiency wage; unemployment; nominal rigidities;

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert D. Dittmar & William T. Gavin & Finn E. Kydland, 2005. "Inflation Persistence And Flexible Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 245-261, 02. [Downloadable!] (restricted)
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  2. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  3. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
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  5. 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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  6. 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)
  7. 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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  8. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
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  13. 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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  14. 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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  15. 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)
  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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Cited by:
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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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