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Insider–Outsider Labor Markets, Hysteresis, and Monetary Policy

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  • JORDI GALÍ

Abstract

I develop a version of the New Keynesian model with insider–outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on (un)employment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. Two simple targeting rules are shown to approximate well the optimal policy. The properties of the model and effects of different policies are analyzed through the lens of the labor wedge and its components.

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  • Jordi Galí, 2022. "Insider–Outsider Labor Markets, Hysteresis, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(S1), pages 53-88, February.
    • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:s1:p:53-88
    DOI: 10.1111/jmcb.12898
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    References listed on IDEAS

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    Cited by:

    1. Laurence Ball & Joern Onken, 2022. "Hysteresis in unemployment: Evidence from OECD estimates of the natural rate," International Finance, Wiley Blackwell, vol. 25(3), pages 268-284, December.

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