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Optimal monetary policy with imperfect unemployment insurance

  • Nakajima, Tomoyuki

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 zero-inflation steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earning 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 significant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 3 (March)
Pages: 365-387

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:365-387
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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