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Uninsured Unemployment Risk and Optimal Monetary Policy

Author

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  • Edouard Challe

    (CREST; CNRS; Ecole Polytechnique)

Abstract

I study optimal monetary policy in a New Keynesian economy wherein households precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feedback to greater unemployment risk. I show this de?flationary feedback loop to be constrained-inefficient and to call for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept signifi?cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy effectively breaks the defl?ationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark.

Suggested Citation

  • Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-54
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    References listed on IDEAS

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    Cited by:

    1. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Sciences Po publications 2017-01, Sciences Po.
    2. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2018. "Inequality, Business Cycles, and Monetary-Fiscal Policy," NBER Working Papers 24710, National Bureau of Economic Research, Inc.
    3. François Le Grand & Xavier Ragot, 2022. "Managing Inequality Over Business Cycles: Optimal Policies With Heterogeneous Agents And Aggregate Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 511-540, February.
    4. Sushant Acharya & Keshav Dogra, 2020. "Understanding HANK: Insights From a PRANK," Econometrica, Econometric Society, vol. 88(3), pages 1113-1158, May.
    5. Xavier Ragot, 2018. "Limited Participation, Capital Accumulation and Optimal Monetary Policy," Sciences Po publications 2018-12, Sciences Po.
    6. Joel M. David & David Zeke, 2021. "Risk-Taking, Capital Allocation and Optimal Monetary Policy," Working Paper Series WP-2021-01, Federal Reserve Bank of Chicago.
    7. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    8. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    9. repec:hal:spmain:info:hdl:2441/4lhe3u3c38ojohjlcbfaupcjr is not listed on IDEAS
    10. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Sciences Po publications 2017-01, Sciences Po.
    11. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2021. "Inequality, Business Cycles, and Monetary‐Fiscal Policy," Econometrica, Econometric Society, vol. 89(6), pages 2559-2599, November.
    12. repec:hal:spmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    13. Boris Chafwehé & François Courtoy, 2021. "Optimal Taxes and Transfers with Household Heterogeneity," LIDAM Discussion Papers IRES 2021009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    14. Bilbiie, Florin, 2018. "Monetary Policy and Heterogeneity: An Analytical Framework," CEPR Discussion Papers 12601, C.E.P.R. Discussion Papers.
    15. repec:hal:spmain:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    16. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    17. repec:hal:wpspec:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    18. repec:hal:spmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    19. repec:hal:wpspec:info:hdl:2441/4lhe3u3c38ojohjlcbfaupcjr is not listed on IDEAS
    20. repec:hal:wpspec:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS

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    More about this item

    Keywords

    Unemployment risk; imperfect insurance; optimal monetary policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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