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Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs

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  • Antoine Lepetit

    (Banque de France - Banque de France - Banque de France)

Abstract

I show that labor market asymmetries are key to generating a quantitatively significant trade-off between inflation and unemployment stabilization in New Keynesian models with search and matching frictions in the labor market. In such an environment, a strong focus on inflation stabilization in response to shocks comes at the cost of larger labor market volatility. Because unemployment fluctuations are asymmetric, it also results in higher average unemployment. The optimal policy responds strongly to both inflation and employment and stabilizes labor market fluctuations. Most of the welfare gains from adopting this policy are accounted for by the increase in average employment relative to the price stability case. When labor market fluctuations are linear, the monetary authority loses its leverage over average unemployment, and a policy of price stability is close to optimal.

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  • Antoine Lepetit, 2018. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs," Working Papers hal-01536416, HAL.
    • Handle: RePEc:hal:wpaper:hal-01536416
    Note: View the original document on HAL open archive server: https://hal.science/hal-01536416v2
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    Cited by:

    1. Rendahl, Pontus & Freund, Lukas B., 2020. "Unexpected Effects: Uncertainty, Unemployment, and Inflation," CEPR Discussion Papers 14690, C.E.P.R. Discussion Papers.
    2. Antoine Lepetit, 2022. "The Optimal Inflation Rate with Discount Factor Heterogeneity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 1971-1996, October.
    3. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2022. "The Matching Function and Nonlinear Business Cycles," Working Papers 2201, Federal Reserve Bank of Dallas.
    4. Stéphane Dupraz & Emi Nakamura & Jón Steinsson, 2019. "A Plucking Model of Business Cycles," NBER Working Papers 26351, National Bureau of Economic Research, Inc.
    5. Lukas Freund & Hanbaek Lee & Pontus Rendahl, 2023. "The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 117-137, December.
    6. Kurt Graden Lunsford, 2020. "Recessions and the Trend in the US Unemployment Rate," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2021(01), pages 1-8, February.
    7. Kohlbrecher, Britta, 2019. "The (ir)relevance of real wage rigidity for optimal monetary policy," FAU Discussion Papers in Economics 07/2019, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    8. Kurt Graden Lunsford, 2023. "Business Cycles and Low-Frequency Fluctuations in the US Unemployment Rate," Working Papers 23-19, Federal Reserve Bank of Cleveland.
    9. Lukas Freund & Hanbaek Lee & Pontus Rendahl, 2023. "The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 117-137, December.
    10. Binh Thai Pham & Hector Sala, 2022. "Cross-country connectedness in inflation and unemployment: measurement and macroeconomic consequences," Empirical Economics, Springer, vol. 62(3), pages 1123-1146, March.
    11. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2021. "Nonlinear Search and Matching Explained," Working Papers 2106, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Optimal monetary policy; Unemployment Asymmetries; Matching frictions;
    All these keywords.

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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