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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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    Cited by:

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    2. 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.
    3. repec:spo:wpmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    4. Cui, Wei & Sterk, Vincent, 2018. "Quantitative easing," LSE Research Online Documents on Economics 90874, London School of Economics and Political Science, LSE Library.
    5. Xavier Ragot, 2018. "Limited Participation, Capital Accumulation and Optimal Monetary Policy," Working Papers hal-03444395, HAL.
    6. Mengus, Eric & Barthelemy, Jean, 2017. "Monetary Rules, Determinacy and Limited Enforcement," HEC Research Papers Series 1202, HEC Paris, revised 11 May 2019.
    7. 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.
    8. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    9. repec:spo:wpecon:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    10. 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.
    11. 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).
    12. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    13. repec:spo:wpmain:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    14. repec:spo:wpmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    15. 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.
    16. Andrea Boitani & Lorenzo Di Domenico & Giorgio Ricchiuti, 2024. "Monetary policy and inequality: an heterogenous agents’ approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def133, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    17. repec:spo:wpecon:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    18. Sushant Acharya & Keshav Dogra, 2020. "Understanding HANK: Insights From a PRANK," Econometrica, Econometric Society, vol. 88(3), pages 1113-1158, May.
    19. Florin O Bilbiie, 2025. "Monetary Policy and Heterogeneity: An Analytical Framework," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(4), pages 2398-2436.

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    Keywords

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    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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