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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.

Suggested Citation

  • 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.archives-ouvertes.fr/hal-01536416v2
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    References listed on IDEAS

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    Keywords

    Matching frictions; Optimal monetary policy; Unemployment Asymmetries;

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