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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 steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earnings 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 signifficant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.

Suggested Citation

  • NAKAJIMA Tomoyuki, 2009. "Optimal Monetary Policy with Imperfect Unemployment Insurance," Discussion papers 09014, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:09014
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    1. Antoine Lepetit, 2020. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-Offs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 29-45, April.
    2. Robert Jump, 2014. "A Fair Wage Explanation of Labour Market Volatility," Studies in Economics 1413, School of Economics, University of Kent.

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    More about this item

    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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