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Optimal monetary policy with imperfect unemployment insurance

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  • Nakajima, Tomoyuki

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 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.

Suggested Citation

  • Nakajima, Tomoyuki, 2010. "Optimal monetary policy with imperfect unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 365-387, March.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:365-387
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    Cited by:

    1. Antoine Lepetit, 2016. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs," Working Papers hal-01536416, HAL.
    2. Robert Jump, 2014. "A Fair Wage Explanation of Labour Market Volatility," Studies in Economics 1413, School of Economics, University of Kent.

    More about this item

    Keywords

    Optimal monetary policy Efficiency wage Imperfect unemployment insurance Nominal rigidities;

    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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