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A model of euro area unemployment persistence and central bank stabilization policies

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  • Giakas, Konstantinos

Abstract

Empirical evidence suggests that euro area unemployment is highly persistent. Motivated by this, we develop a euro-area-calibrated monetary DSGE model that uniquely integrates financial frictions and employment hysteresis. Impulse response analysis shows that the model generates deep and persistent recessions that are not accompanied by significant deflation, questioning the effectiveness of standard inflation-focused monetary policy. This leads us to explore alternative “simple” (un)conventional monetary policy rules. We show that welfare-optimized policies that stabilize labor or financial markets outperform standard price inflation targeting. The welfare gains from adopting these alternative policies increase with hysteresis and the severity of the financial shock. Our findings underscore the importance of monitoring labor or financial market variables during financial crises and call for a re-evaluation of central bank policies in economies with persistent unemployment fluctuations.

Suggested Citation

  • Giakas, Konstantinos, 2026. "A model of euro area unemployment persistence and central bank stabilization policies," Research in Economics, Elsevier, vol. 80(2).
    • Handle: RePEc:eee:reecon:v:80:y:2026:i:2:s1090944326000244
    DOI: 10.1016/j.rie.2026.101136
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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