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Unemployment, inflation and monetary policy in a dynamic New Keynesian model with hiring costs

  • Mirko ABBRITTI
  • Andrea BOITANI
  • Mirella DAMIANI

The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemployment. After calibrating the model, through simulations we are able to show that our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of different market imperfections on both the steady state and the dynamics of the economy. We are also able to show how two economies, differing in their “degrees of imperfection”, react to policy or non policy shocks: a rigid economy turns out to be less volatile than a flexible economy. Something that reflects the actual experience of the US (flexible) and European (rigid) economies.

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Paper provided by Università di Perugia, Dipartimento Economia in its series Quaderni del Dipartimento di Economia, Finanza e Statistica with number 22/2006.

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Length: 33 pages
Date of creation: 01 Sep 2006
Date of revision:
Handle: RePEc:pia:wpaper:22/2006
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