Unemployment fluctuations, and optimal monetary policy in a small open economy
AbstractIn this paper, we incorporate key ingredients of a small open economy into the New Keynesian model with unemployment of Gali (2011a,b) to discuss the design of the monetary policy. The main findings regarding the issue of monetary policy design can be summarized as threefold. First, the optimal policy is to seek to minimize variance of domestic price inflation, wage inflation, and the output gap if both domestic price and wage are sticky. Second, stabilizing unemployment rate is important to reduce the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Last, controlling CPI inflation is the best when the policy is not allowed to respond to unemployment rate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Windsor, Department of Economics in its series Working Papers with number 1309.
Length: 31 pages
Date of creation: 28 Aug 2013
Date of revision:
Contact details of provider:
Postal: 401 Sunset Avenue, Windsor, Ontario, N9B 3P4
Phone: (519) 253-4232 ext 2368
Fax: (519) 973-7096
Web page: http://www.uwindsor.ca/economics/
More information through EDIRC
Unemployment; Monetary policy; Small open economy.;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-06 (All new papers)
- NEP-CBA-2013-09-06 (Central Banking)
- NEP-MAC-2013-09-06 (Macroeconomics)
- NEP-MON-2013-09-06 (Monetary Economics)
- NEP-OPM-2013-09-06 (Open Economy Macroeconomics)
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.:
- Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
- Faia, Ester, 2007.
"Ramsey monetary policy with labour market frictions,"
Working Paper Series
0707, European Central Bank.
- Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999.
"Optimal Monetary Policy with Staggered Wage and Price Contracts,"
Computing in Economics and Finance 1999
1151, Society for Computational Economics.
- Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
- Karlygash Kuralbayeva, 2011.
"Inflation Persistence and Exchange Rate Regime: Implications for dynamic adjustment to shocks in a small open economy,"
OxCarre Working Papers
063, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Kuralbayeva, Karlygash, 2011. "Inflation persistence and exchange rate regime: Implications for dynamic adjustment to shocks in a small open economy," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 193-205, June.
- Olivier Blanchard & Jordi Galí, 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.
- Olivier Blanchard & Jordi Galí, 2006. "Labor markets and monetary policy: A new-Keynesian model with unemployement," Economics Working Papers 1076, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2008.
- Olivier Blanchard & Jordi Gali, 2008. "Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment," NBER Working Papers 13897, National Bureau of Economic Research, Inc.
- 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.
- Richard Clarida & Jordi Gali & Mark Gertler, 2002.
"A Simple Framework for International Monetary Policy Analysis,"
NBER Working Papers
8870, National Bureau of Economic Research, Inc.
- Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers 3355, C.E.P.R. Discussion Papers.
- Carlos Thomas, 2006.
"Search and Matching Frictions and Optimal Monetary Policy,"
CEP Discussion Papers
dp0743, Centre for Economic Performance, LSE.
- Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
- Carlos Thomas, 2006. "Search and matching frictions and optimal monetary policy," LSE Research Online Documents on Economics 19782, London School of Economics and Political Science, LSE Library.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Trudeau).
If references are entirely missing, you can add them using this form.